Recently, I had a productive conversation with clients who were planning their retirement. We discussed timelines and strategies to secure their future, including selling their current home and weighing the benefits of continuing homeownership versus stepping away from the housing market.

Their current home is valued at around $1.2 million, with no mortgage. They also have savings and RRSPs, but most of our focus was on how to optimize their real estate assets for retirement. If they sold their home, they’d have around $1.14 million in equity to invest, so the key question was how to best use that money to achieve their goals, including frequent travel.

Here’s a look at the options we explored based on their real estate and assets. A scenario like this could apply to many of your clients and come in handy when discussing their options.

Option 1: Sell and invest locally

One possibility was selling their home and purchasing a property in Oshawa with a legal accessory apartment for around $800,000. After covering purchase and closing costs, they would have $300,000 left to invest.

At a 4.0 per cent return, this would generate approximately $12,000 in annual income. In addition, the accessory apartment could be rented for about $1,800 per month, bringing in an additional $21,600 annually.

This would give them a total of $33,600 per year in combined income, which would be taxable but with minimal tax implications given their lower retirement income. Plus, some home expenses could be written off as rental deductions.

Option 2: Buy a seasonal or vacation home

Another appealing option was using the $300,000 to purchase a winter home in Florida instead of investing it in the stock market. After converting the funds to American dollars, they would have about $225,000 to buy a property in “The Villages” northwest of Orlando.

The carrying costs would be about $300 per month. Although this option wouldn’t generate investment income, they would still earn $21,600 annually from renting out their Oshawa property. Additionally, they could rent out their Florida home when not using it, potentially generating $3,000 to $4,000 per month in U.S. dollars.

Helping your clients explore equity-shifting opportunities

This conversation highlighted how many homeowners, particularly those who have lived in their homes for decades, overlook the financial potential of downsizing or shifting their equity into different types of properties. Even if they opted to rent rather than purchase a vacation home, the income from investments or property rentals could still comfortably cover their travel and living expenses.

For homeowners in the Durham Region and many other areas, selling and reinvesting home equity offers a range of benefits, from financial freedom to increased quality of life. I’ve spoken to many who regret holding onto their homes for too long, only to find that rising maintenance costs strained their budget and limited their ability to enjoy retirement luxuries like travel.

At a certain point, it’s important to reassess whether homeownership continues to make sense or if downsizing is the smarter financial move. For my clients, their next step was to consult their accountant about the tax implications of owning rental properties both locally and in Florida.

It’s a good problem to have as they enter this exciting new phase of life. Your clients might be in a very similar position.

There are steps we can take to shorten your number of days to quitting time, aka retirement. The math of life after real estate has two major pieces to it. In the simplest form, it’s money coming in and money going out. We’ve discussed the first part, but the latter is important as well.

It’s helpful to ask if we’re able to cut expenses without taking any of the fun away. A lower income requirement means needing fewer savings and other income resources. Lower income means lower taxes and retiring sooner without it necessarily being less fulfilling. 

Where can you cut expenses without cutting your lifestyle?

To reduce your expenses without impacting your lifestyle, look in the following areas.

1. Use extra cash to become debt-free sooner. List your debts in order from highest to lowest interest rate and pay them off in order. Some may be tax deductible, such as a mortgage on a rental property or a student loan, so be sure to reduce the face amount by 20 per cent to 50 per cent depending on your tax rate and the type of expense.

Debts on a rental property, for example, should not necessarily be paid off sooner or at all. Once your personal debts are eliminated, your monthly “nut” will shrink dramatically.

2. Do you need that life insurance anymore? This policy was likely to cover your mortgage and leave a lump sum for your kids, especially when they were young. But the kids are mostly supporting themselves now, and the house is paid off. I would argue that you need less or no coverage now. The key question is to ask what would happen if you died. Would your dependents go hungry or would they be sufficiently independent?

If you have a permanent type of policy with an investment value and ongoing payments (such as Whole or Universal Life), you might consider making the insurance part less, so that it’s “paid up” sooner — meaning you have some coverage, but you don’t need to continue making payments.

3. What about disability insurance? Do you still need it? If you were disabled, how would your bills be paid? Do you have sufficient income sources? Does the policy have a cash-back rider, payable every so many years for persons who are claim-free? If so, pay attention because cancelling the policy early could forgo that lump sum of cash.

Keep in mind that most disability policies cover you until age 65, then payments to you would cease. So, if you’re close to that age and only have a few years left of work plus a solid financial base, does continuing to pay for coverage make sense?

4. There are a few basic types of fully taxable investment returns: interest, rent, foreign dividends, Canadian source dividends and capital gains.

If held outside of registered savings accounts, each is taxed differently. You may reduce income taxes significantly by rearranging your investments. Speak to an advisor about this.

5. Go over your credit card statement and find those monthly subscription fees. Are you still using these services? If not, cancel them.

6. If you’re incorporated, are you expensing everything you’re eligible for? How about life insurance premiums? Medical, dental and eyewear? Even travel medical insurance is an eligible medical expense. If you haven’t yet, set up a healthcare trust account.

7. If you’re incorporated and have children that can add valuable help to your business such as cleaning your office, making deliveries, etc., your corporation can pay them and issue a T4 slip.

Ask your tax professional. They could then use that money to fund an RESP for their post-secondary education.

8. If you have a spouse, explore ways to split income, which could lower income tax.

Once retired and collecting CPP, you can request an assignment. This combines two pensions, divides them in half and pays each spouse, redistributing income to the lower tax and possibly reducing taxes payable, each year, forever.

9. If you have professionally managed investments, what fee are you paying? Larger accounts deserve lower fee percentages. Larger amounts are also negotiable.

Saving half a per cent on a $2 million account is $10,000 per year of savings. Over 10 years, that’s $100,000. Management is certainly worth paying for, as long as it’s a fair reflection of value.

Positive changes to your finances compound each year. With diligence and patience, an independent and fulfilling life after work is achievable.

Over the last few years, the financial landscape has undergone a major shift, with the cost of living crisis casting a shadow on the traditional notions of financial security in retirement.

From skyrocketing house prices to rising costs of healthcare and everyday essentials, the gap between what seniors want and what is realistic when it comes to aging in place is growing significantly.

Research from the National Research Council Canada found that if given the choice, 85 per cent of Canadians would prefer to age in place. Meaning it’s time to acknowledge the new reality Canadians are facing and equip them with the tools they need to make informed decisions about their financial future from planning pre- and post-retirement.

The reverse mortgage

One often misunderstood solution is the reverse mortgage. A reverse mortgage helps homeowners over the age of 55 age in place by providing them access to equity in their home to support general or unexpected expenses, give a living inheritance to their loved ones, or fund home renovations.

Empowering aging in place

A reverse mortgage can be a lifeline for homeowners 55 and above, offering them the means to age in place gracefully. Contrary to traditional mortgages, it doesn’t burden them with monthly payments.

Instead, it furnishes tax-free funds, with interest accruing over time and the loan becoming due upon the homeowner’s passing or decision to sell. Crucially, beneficiaries still retain access to vital benefits such as Old Age Security.

Meeting diverse needs

The beauty of a reverse mortgage lies in its versatility. For homeowners burdened with monthly mortgage payments, it liberates them from this financial strain, putting more money back in their pockets. Others may utilize the funds for renovations, supporting their children or addressing unexpected expenses. It’s a flexible tool tailored to meet the unique needs of each individual client.

Addressing retirement concerns

In today’s economic landscape, retirement planning is fraught with concerns about rising costs and dwindling savings. A study done by Angus Reid earlier this year underscores this apprehension, with 67 per cent of Canadian homeowners aged 55 and above expressing worries about maintaining their lifestyle throughout retirement.

Real estate is often their most valuable asset, presenting a viable opportunity. With property prices where they are, tapping into home equity sustainably and responsibly has become a major source of financial relief for those who are “house rich” but still struggling to live the comfortable retirement they desire.

Common misconceptions

Despite the benefits, reverse mortgages are often surrounded by negative myths and misconceptions. Let’s set the record straight.

Myth: You no longer own your home with a reverse mortgage.

Reality: With a reverse mortgage, homeowners retain 100 per cent ownership of their property.

Myth: You may owe more than what your home is worth.

Reality: Legitimate reverse mortgage providers offer a no-negative-equity guarantee, which ensures that homeowners or their heirs will never owe more than the fair market value of the home.

Myth: Your children will lose the family home.

Reality: The estate retains ownership of the home, offering heirs the opportunity to refinance or settle the mortgage through alternative means.

Myth: There will be no equity in the home to give to your heirs.

Reality: Despite the loan balance, homeowners or their heirs often retain considerable equity, especially in a rising home price environment.

Reverse mortgages represent a powerful tool in retirement planning and post-retirement, offering financial security, flexibility and peace of mind. As trusted advisors, we need to ensure clients are well-informed and guide them toward a retirement characterized by financial freedom and stability.