It\u2019s getting more and more diffi-cult for retirees to afford home ownership as property taxes, utilities charges, and repair and maintenance costs keep rising. And for your clients who are approaching retirement, this is a worrisome development \u2014 particularly if they are already facing budget constraints.
Statistics Canada\u2019s consumer price index indicates that the cost of home ownership was 26.9% higher in September, on average, than in 2002, while utility charges were 34.1% higher. Those are significantly greater increases than the 16.9% average rise for all consumer items \u2014 and many experts expect property taxes and utility costs to keep rising.
The obvious answer for clients facing this reality, as they approach retirement, is to downsize; however, that can be a very difficult decision. That\u2019s because the location at which clients live can be central to their lifestyles; they could be near shops and recreational facilities they use, as well as people who are close to them. Thus, moving to a new neighbourhood can be a heart-wrenching experience.
Nonetheless, moving late in life is a viable option. Jack Courtney, assistant vice president, advanced financial planning, with Investors Group Inc. <\/b> in Winnipeg, cites the case of his father, who found moving into an assisted-living apartment a real bonus, as he started to interact with more people and made good friends in the process. Courtney\u2019s in-laws also benefited when they moved to a condo and found they were entertaining more guests because there was a large, well-equipped room on the property they could use.
\u201cThere is no right answer,\u201d say Sheila Munch, senior financial planning advisor with Assante Financial Management Ltd. <\/b> in Oshawa, Ont. \u201cEach situation is unique.\u201d
But for clients who don\u2019t want to downsize, they can\u2019t live beyond their means for very long \u2014 regardless of how much they value their lifestyles. Clients who are financially strained need to look hard at their situation and figure out what can be managed.
That said, it\u2019s also a good idea for clients in good financial shape approaching retirement to consider their housing options; they need to decide whether, and for how long, they want to stay where they are.
Here\u2019s a look at some of the factors that need to be considered:
> Ownership Costs. <\/b> Most people approaching retirement have paid off their mortgages, so their key costs are property taxes, utilities, maintenance and repairs \u2014 the costs of which are expected to continue climbing.
If you have clients who expect to carry significant mortgage debt when they retire, they need to take a serious look at why they still have debt, says Adrian Mastracci, president of KCM Wealth Management Inc. <\/b> in Vancouver. Debt at that age usually means significant changes are needed in many spending areas.
> Downsizing. <\/b> For anyone who finds it difficult to meet the costs of home ownership, downsizing is an obvious solution \u2014 but it may not work out as planned, warns Mastracci. If the real estate market isn\u2019t good, your clients may not be able to sell \u2014 or sell at a price that will leave them with sufficient assets both to buy a smaller place and to add assets to their investment portfolios.
It\u2019s also worth noting that selling and moving costs are substantial. Barb Garbens, president of Toronto-based financial planning firm B L Garbens Associates Inc. <\/b> wouldn\u2019t recommend selling a $400,000 home and buying one for $350,000 as most of the $50,000 gain would be eaten up by real estate commissions, legal fees, land transfer taxes, the move itself, decorating and, perhaps, some renovation costs. But going from a $700,000 home to a $500,000 one would make sense, as there would be a substantial amount left over to pay off debt or invest.
Clients may also think they will be fine with a smaller place, but they may hate it when they move in. Mastracci has had clients who had downsized and then upsized. Renting can help your clients decide if a smaller place is right for them.@page_break@A major misunderstanding about downsizing is that clients don\u2019t necessarily pay less for less space. An older home with 2,500 square feet may well cost the same as a condo with 1,200 or 1,500 square feet.
> Condo Fees. <\/b> If clients move into a condo, the associated fees can be an issue down the road if major repairs are needed. For instance, Vancouver condo owners suffered from \u201cleaky condo syndrome\u201d when several condos constructed in the 1970s and 1980s developed interior wall rot because the buildings\u2019 design, which originated in Los Angeles, was unsuitable for Vancouver\u2019s wet climate. Some special assessments to deal with this issue were as high as $50,000-$60,000, says Mike Berton, certified financial planner with Assante in Vancouver.
Potential condo buyers should find out if there have been problems requiring major repairs with condos similar in structure to what the buyers are looking at. Buyers also need to find out: if the condo building has been well maintained; if there are sufficient funds in reserve, should significant repairs be needed; and how frequently condo fees have risen in the past.
Talking to owners of other condos in the building or the development can be very helpful. It\u2019s also worth noting that the smaller the number of condos in a building\/development, the higher the assessments may be because there aren\u2019t many owners among whom to share the cost.
> House Price Appreciation. <\/b> Another potential misconception is that owning a home will result in better returns than investing the same amount in other assets. There are certainly periods during which that has been true, including the past decade, when house prices across Canada rose by an average of 8% a year. But there are also extended periods during which prices don\u2019t move at all, or may even fall. Garbens says the long-term average annual real return on Canadian homes is 2%.
Most economists and financial advisors think that house prices will rise only moderately in the next decade; in fact, many say prices may even fall. Garbens expects an average of 2% real appreciation annually, while she thinks real investment returns will be in the 1%-4% range annually, depending on the asset mix.
> Other Housing Options. <\/b> The choice isn\u2019t just among owning a big house, a smaller house or a condo. Other possibilities include rentals, buildings and developments for those aged 55-plus, and leasing.
Renting means no responsibility for repairs \u2014 or having to access your capital. And it also means being at the mercy of the landlord in terms of upkeep, rent increases and the possibility of being forced to move when the lease is up. You can run projections showing how long your client\u2019s financial assets will last, given specified rent and a range of possible rent increases.
One of the benefits of renting is that the client can move to a different size and location without much trouble if an apartment is unsatisfactory.
Buildings or developments for those aged 55-plus ensure that residents won\u2019t have neighbours who are noisy, either because of small children and\/or loud parties hosted by younger people. Such facilities also provide the possibility of interacting and making friends with neighbours, particularly if they include recreational or fitness facilities.
But your clients also need to find out what the rules are. These may be very extensive, down to what kind of tree you can plant, what kind of patio you can have and what colour you can paint your front door, says Munch, who has had first-hand experience with such restrictions.
Specialized leasing arrangements may also be possible. Courtney notes that there are 55-plus developments in which you can put down a sum, such as $50,000, which gives you the right to live in the house or apartment you have chosen for the rest of your life, for a specified rent that will never increase. When you move or die, you get back the $50,000. These arrangements are now available in all provinces west of Quebec \u2014 and they can include options to get, or move to, assisted living within the complex.\t IE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
It\u2019s no surprise that the cost of housing \u2014 in all its aspects \u2014 has increased substantially. So, your clients, whether financially strained or well off, need to consider their housing options as they approach their retirement years<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3018],"tags":[2346,2637],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317649"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=317649"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317649\/revisions"}],"predecessor-version":[{"id":363327,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317649\/revisions\/363327"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=317649"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=317649"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=317649"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=317649"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}