Lifestyle | My house is my retirement fund

Buying a property is a form of forced saving. Those who are lucky enough to do so will often do almost anything to keep it. But before you can enjoy it, you have to pay for it first.

The situation

“My house is my pension fund.” Josianne*, 40, often heard this phrase from her mother, who couldn’t save for retirement but planned to sell her house when she needed cash for her old age. For her part, Josianne has been contributing to the Quebec Government and Public Employees Retirement Plan (RREGOP) for 18 years and has $32,000 invested in a labour-sponsored fund. She bought a house in the suburbs in 2022, at a high price, with her partner of the last six years, Vincent*. They really like their house, which is also inhabited by three teenage girls who will leave the family nest in about ten years.

Vincent has been contributing $75 per pay for three years to a voluntary retirement savings plan (VRSP) to which his employer does not contribute. He has been investing the same amount in a worker-sponsored fund for three years.

Josianne feels that they will run out of savings for retirement and is thinking about a solution. She is thinking about selling their house towards the end of their working life to buy a cheaper one outside of urban centres.

“We could take the difference between the two houses and invest it for about 10 years before we start putting money aside for our retirement.”

She wonders if it is worth it, especially since her partner will inherit a cottage in a few years.

Advice

It’s true that when something goes wrong, retirement savings are often the first thing people cut back on or eliminate, notes Hadi Ajab, an independent financial planner and mutual fund representative with PEAK Investment Services.

“However, in order to keep their home, people will tend to cut back a lot on other expenses, like restaurants and travel,” he says. “Certainly, homeownership meets the basic need of housing and with the housing crisis, it also represents security. In addition, a home is the largest asset of most people.”

But for a home to provide many retirement opportunities, it must be fully or largely paid off.

“One of their priorities is therefore to pay off their mortgage quickly while reducing their other expenses as much as possible,” says Hadi Ajab.

Four Options to Take Advantage of Home Value

The financial planner sees four ways for Josianne and Vincent to benefit from the value of their home in retirement.

“Yes, they could sell it and buy a less expensive one when the kids leave home, and then invest the difference,” he says.

However, it is difficult to assess now how financially advantageous this decision would be. It will be necessary to see how much they have paid off their mortgage, how much their current property has increased in value and how much their new property will cost.

“Then, they should ideally make this transaction when the term of their mortgage loan is due because otherwise, they risk having to pay penalties, explains Hadi Ajab. Also, they must think about notary fees, transfer taxes, the cost of moving and settling into the new house.”

There is also the option of selling the house later, for example when the couple moves into a retirement home.

“The couple would then receive the proceeds from the sale of their house and invest the money, but would then have to absorb large monthly expenses for housing,” says Hadi Ajab. “They should therefore invest the amount received, taking into account taxation to properly grow their assets while planning a disbursement plan for the necessary liquidity to meet their needs.”

The couple could also decide to remain the owner of their home and take out a line of credit secured by the property, which is often a maximum of 65% of its value.

“The advantage is that they will only pay interest on the amount used from the margin and they are not obliged to repay the capital before selling their house,” explains the financial planner. “It is a very flexible product that can be a good option, for example, if the couple needs cash and is not yet ready to sell. But you have to remain disciplined with this product and avoid using it for just anything.”

The last option would be a reverse mortgage.

“These loans often have a higher interest rate than a mortgage, but there are no repayments to be made during your lifetime or until the house is sold,” he explains.

Choosing a lifestyle

Now, if Josianne and Vincent have several options in front of them to take advantage of the value of their house, the important thing is that they question themselves about how they want to live in the coming years.

“Josianne says they love their house, but they would like to move away from urban centres,” Hadi Ajab points out. “It’s not the same lifestyle at all. This decision should not be made only with the financial aspect in mind.”

Another thing to think about is the cottage they’ll inherit in a few years. “The couple should ask themselves if they would want to live there year-round,” says the financial planner. “If so, they could sell their home, invest that money for their retirement and live in the cottage without a mortgage.”

They could also sell this cottage. Another option: keep both properties. “But then they should consider that the capital gain would be partly taxable at the time of the sale of the second home,” he specifies.

The limits of RREGOP

As a financial planner who looks at the overall picture of people, Hadi Ajab also wants to address other elements in relation to Josianne and Vincent’s situation. First, there is the RREGOP.

“It’s an excellent defined benefit pension fund, but Josianne has to consider the indexation which is much lower than inflation,” he says. “If she wants to maintain the same lifestyle over the years, she will have to have savings to fill the gap.”

He also emphasizes the importance of considering coordination with the Quebec Pension Plan (QPP) at age 65.

“The RREGOP pension drops at age 65 because it is coordinated with that of the QPP,” explains Hadi Ajab. “To make its calculations, the RREGOP considers the value of the QPP at age 65, regardless of when the person decides to apply for their pension.”

Taking advantage of RESPs

The financial planner also wants to mention the importance for the couple of benefiting from the registered education savings plan (RESP) for the three teenage girls.

“Per child, parents can get a maximum of $7,200 in Canada Education Savings Grants, $3,600 with the Quebec incentive and for eligible families, up to $2,000 in Canada Learning Bonds while respecting the annual contribution limits,” says Hadi Ajab. “But what they need to know is that the limit for receiving these grants is during the year the child turns 17. So time is running out for them.”

The financial planner also points out that the RESP could help the couple when they retire. “When the teenage girls are in post-secondary education, the couple can pay them the grants and the performance, then take the amount of their contributions and deposit it in their RRSPs. I advise them to make the RESP a priority, even if it means putting the brakes on other types of savings for a while.”

*Although the case highlighted in this section is real, the first names used are fictitious.