House in the winter

Should You Rely on Your House to Fund Your Retirement?

by Invisor Last updated on October 25, 2017 Tags: Retire Early

Image: Nathan Walker 

If you own your home, there’s likely a lot of equity tied up in it, especially with the spike in house values we’ve seen the past couple years. If you’re planning on downsizing in retirement, you might be considering funding your post-work years with the money earned from selling your home. In fact, according to a recent study by the Ontario Securities Commission, nearly 4-in-10 homeowners in Ontario aged 45 and over are relying on the appreciation of their home to get them through retirement.

While this plan may seem fool-proof, relying on the value of your home should not be your only strategy when saving for your retirement years. Here's why. 

1. The value of your home is not guaranteed

As we’ve seen in the Canadian market, home values can increase significantly. This may be great when you’re selling, but the truth is the market is unpredictable and can drop just as fast. Over time your home will appreciate, but you can’t anticipate what the state of the market will be when it comes time to sell. Therefore, you’ll never have an accurate idea of how much money you’ll have to fund your retirement, or a clear timeline for when you might be able to sell and ease into the next phase of your life. 

2. The equity tied up in your home is not easily accessible

In the case of an emergency, dipping into the equity of your home would not be easy or wise. Unlike with an investment account, the process of cashing in on your home does not have a quick turnaround time. You first need to list and sell your home, wait for it to close – you get the picture.

3. You shouldn't put all your eggs in one basket

When it comes to investing, holding a diversified portfolio is crucial in making sure you have multiple sources of income to fall back on should a specific fund underperform. You should never rely on your money being safe in one savings vehicle. The same is true in this situation. By solely relying on your home to fund your retirement, you’re not giving yourself room to weather financial ups and downs.  

There are safer ways of saving towards your retirement. Here are some of them:

1. Invest in a diversified portfolio

One of the biggest issues with relying on your house to fund your retirement is that all your eggs are in one basket. If the housing market had a significant correction and interest rates were through the roof, borrowing against the value of your house would be significantly impacted. The way to avoid the risk of concentrating your investments is to diversify them across several holdings and asset classes. That way, if an adverse effect negatively impacts one security – or even an entire sector – others can avoid the effect, and your portfolio returns will be influenced by broader global productivity rather than isolated events. Diversification allows you to take advantage of growth while minimizing your risk.

2. Consider the value of your home as one piece of the pie, not the whole dessert

Many people downsize in retirement, opting for a smaller home or moving to another property, like their cottage. If this is in your plan, you can absolutely include the value of your home as part of your retirement strategy. Real estate, as a portion of your portfolio, does help to further diversify. It’s important to be conservative when estimating the net payout you’ll get from the sale of your property. Be sure to account for closing costs, real estate fees, and other costs that impact the return of a sale of a home.

3. Make sure your plan is protected

While knowing where your money will come from in retirement is important, it’s just as important to make sure you have sufficient life and health insurance to protect your ability to save towards your retirement goal. Do a free insurance needs analysis to see if there are any gaps in your plan and top up your coverage accordingly. This will ensure you can follow through with your plans in the case of an emergency. 

Your home is a large source of equity and may help you further your retirement goals, but it’s important to make sure you have a financial plan in place that includes a diversified portfolio and adequate insurance coverage. Tools like InvisorGPS™ can help you set and track your retirement goal, so you can see exactly where you’re at in terms of reaching it. Tracking your complete financial plan will give you peace of mind, without the uncertainty of banking on the housing market.

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