Retirement: Banking on real estate

Ablett and other retirement planning experts suggest that clients who expect to leverage the value of their homes to make up for anticipated shortfalls in retirement income are pursuing a risky strategy but acknowledge that with rising real estate values, the family home has taken a greater role in the planning equation.

“I think it’s incumbent on advisors to bring the idea of the family home into the mix sooner rather than later,” Ablett says. “That’s not telling the client, ‘Once you’re retired, you should sell the home right away,’ but saying, ‘It’s likely that at some point in your lifetime, you’re going to have to tap into the equity of your home’.”

According to a recent survey, the results of which were released jointly by Waterloo, Ont.-based Sun Life Financial (Canada) Inc. and the Markham, Ont.-based advocacy group CARP, slightly fewer than one-third of Canadians between the ages of 45 and 65 said that they intended to sell investments in real estate to fund their retirement. Almost 90% of those surveyed expected to live into their 80s, and 40% said they were worried about outliving their savings.

Says Vicken Kazazian, senior vice president of the career sales force at Sun Life Financial: “Many are saying, ‘I’m going to have to sell my home.’ Others are saying, ‘I may have to go back to work.’ And others are asking, “What if I get sick?’ The survey really points out that these kinds of worries are growing in people’s minds.”

Retirement experts say that there are many risks in relying on plans to sell the home to fund part of a client’s retirement, including overestimating the amount of capital that can be generated from downsizing and not accounting for a possible housing-price downturn that could make it difficult to sell the home for the expected amount.

“Real estate is less volatile than equities,” Kazazian says. “But we have seen where housing values can drop significantly.”

The baby boomers have been driving up demand in housing for 40 years, says Chris Buttigieg, senior manager of retirement planning at Bank of Montreal (BMO) in Toronto, and the author of a BMO report on retirement released in October. The boomers’ gradual move to downsize, combined with a host of other economic factors, notably rising interest rates, he says, may lead to a drop in prices over the next 20 years.

“If there is a reliance on that home equity to provide income,” Buttigieg says, “it’s certainly worth addressing [with the client] the risk that a drop in value could affect the retirement plan.”

Even those retirees who don’t intend to sell their home may find they are forced to, whether it’s because they require an easier-to-manage, smaller home or because they need supplemental income.

“Certainly, the [ideal] objective would be that a family can accumulate enough retirement savings without having to sell the home,” Ablett says. “But for some couples – with people losing their jobs early; with all the economic factors – it’s inevitable that they will have to take into account the value of their home in funding their retirement.”

Housing is a lifestyle issue, Buttigieg says, and any conversation with your client regarding real estate and retirement must begin with an examination of what the home represents to your client: is it more of a “castle” and an essential hub for family and other social connections; or more of an asset, which can be leveraged for income to fund retirement?

Even those clients who have made the decision to downsize may find that they are not able to raise enough capital to make a significant difference to their cash flow.

“You have to see how much capital can be freed up by making that decision,” Ablett says. “What’s being found is, with a lot of boomers, they get used to living in a nice house and when they start looking at condos, they want something that replicates what they already had.”

If a client couple sells a $750,000 home and buys a $600,000 condominium, Ablett says, even without factoring in condo fees, they are not really much further ahead.

You also can fall into the trap of leaning too heavily on the value of your client’s home as a possible backstop to that client’s financial plan, says Jason Round, head of financial planning support, with RBC Financial Planning in Toronto.

“Advisors need to help articulate what the home might provide,” Round says, “but don’t see it as a panacea. I think that’s the danger we sometimes get into, particularly with the way the real estate market has gone over the past few years. It’s not reliable, you don’t know what the return [will be]. And it’s not necessarily true that everyone can rely on that equity.”

There are, of course, a number of beneficial ways to include real estate into retirement planning, including sensibly downsizing, renting out a portion of the home, securing a reverse mortgage or choosing to sell the home in favour of living in a rental home.

Experts say that in today’s economic and demographic environment – with investment returns still volatile, interest rates stubbornly low, employment-sponsored retirement plans in decline and Canadians living longer than ever – retirement planning is becoming more complex – and more difficult for individuals to handle without advice.

A survey on retirement savings issues released by Canadian Imperial Bank of Commerce in August revealed that less than half of Canadians in their 50s had met with a financial advisor in the past year, and 61% of those surveyed had not accumulated as much savings as they had believed they would have as they approached their retirement years.

“It’s never been more difficult to be an advisor than in this type of environment,” says Stephen Geist, managing director and president of CIBC Asset Management in Toronto. “But the other side of that coin is that clients have probably never needed it as much as they do now.”IE

For more on issues facing clients in retirement, please see the RRSP special report in this issue.

© 2012 Investment Executive. All rights reserved.