Tag Archives: GIS

How seniors can unlock home equity

By Sheryl Smolkin

Results of Manulife Bank of Canada’s Debt Survey revealed that nearly one in five homeowners expect to access home equity to supplement their retirement income with 10% of respondents planning to downsize and use the excess equity to provide retirement income.

That got me thinking about what options are available to retirees who want to unlock the value of their home to live on when they stop working.

  1. Sell high, buy low
    Of course, the most obvious alternative is to sell your home in a metropolitan area where real estate prices are high and retire to a smaller, less expensive community. For example, it will cost you a lot more to purchase or rent a house in Saskatoon or Regina than if you retire to Rosetown or Wadena.
  2. Downsize
    If you own a large suburban property with the traditional three or four bedrooms and multiple bathrooms, you may want to downsize and simplify. Again, the amount of equity you can unlock will depend on where you are currently living, where you want to move and how much smaller you are prepared to go.
  3. Rent instead
    Even if you have always owned your own home, you may be ready to let someone else worry about escalating taxes, furnace repairs, mowing the lawn and shoveling snow. Investing the proceeds of sale of your home and renting an apartment or a house can give you freedom from those responsibilities, particularly if you want to be able to just lock the door and take off on short notice for parts unknown.The downside is that you get what you pay for. Quality rental stock is in short supply in many areas and the nicer the apartment or house, the higher the rent. Furthermore, rents will increase over time and you may have to move again when your lease is up. You also will not be able to do structural renovations or decorate a rented property in the same way as your own home.
  4. Become a landlord
    Can your single family home be converted into a multi-unit dwelling? If you live in a desirable area and you do a tasteful renovation, the rental income will quickly pay for itself and leave you with a stream of income to supplement your retirement savings.The HGTV show Income Property typically focuses on young couples trying to get into their first home, but there is no reason why a similar strategy cannot work equally-well for seniors who want to age in place. An extra bonus is that if you need live-in care later in life, the apartment can be reclaimed for the use of a caregiver.
  5. Home equity line of credit
    A home equity line of credit, or HELOC, is a revolving line of credit secured by your home at a much lower interest rate than a traditional line of credit. The operation of a HELOC is discussed on ratehub.ca. In Canada, your HELOC cannot exceed 65% of your home’s value. However, it’s also important to remember that your outstanding mortgage loan balance + your HELOC cannot equal more than 80% of the value of your home.You must pay at least the interest owing every month and you can also make extra payments of principle at your discretion. We have a HELOC which came in very handy several times when family members bought and sold property and needed funds to finance a purchase before the sale of their previous homes had closed.
  6. Reverse mortgage
    A reverse mortgage is a home loan that provides cash payments based on home equity. Homeowners normally defer payment of the loan until they die, sell, or move out of the home. CHIP is the only Canadian financial institution that currently offers reverse mortgages. The Pros and Cons of a Reverse Mortgage are discussed in detail in an excellent guest blog by Tricia French on Retire Happy. Reverse mortgages allow clients over 55 to access up to 50% of their home’s value. Payments from a reverse mortgage are tax-free income, so your income-tested benefits such as OAS and GIS will not be affected.You can repay the loan at any time and the amount you owe can never exceed the value of your property. You and your beneficiaries also will not be responsible for any shortfall if interest rates increase and housing values drop.Nevertheless, interest will quickly grow on the amount you have borrowed and start up fees can be thousands of dollars. A reverse mortgage can quickly erode the money you have available when you eventually sell and therefore the size of the estate you can eventually leave to your children.
  7. Sell ‘n Stay
    I recently learned about a new concept called Sell ‘n Stay where seniors can sell their home to an investor and lease it back for 10 years or even for life. Unlike a reverse mortgage, the homeowner can access 100% of the equity in their home. The concept, developed by Real Estate Agent Saskia Wyngaard, is currently only available in Ontario.Market value of the house is determined by comparing sales of similar homes that have sold recently in the same neighborhood. The house is offered for sale through an exclusive listing without open houses or staging. Exposure is limited to buyers who are interested in purchasing an investment property with an in-place A+ tenant.The new owner pays for taxes, insurance and repairs. The previous owner pays market rent of about 5% of the value of the house, renter’s insurance and utilities. Since 2013 Wyngaard has been involved in 15 such arrangements with lease backs of 10 years.

****************

Whatever method you choose to unlock equity in your home to supplement your retirement, the optimum situation is to pay off your mortgage before you retire. This will give you the most flexibility to plan for life after work without the burden of paying off debt.

2015 Changes to RRIF Withdrawal Schedule Not Enough, says C.D. Howe

By Sheryl Smolkin

A new report from the C.D. Howe Institute says that the lower mandatory draw downs from RRIFs and similar vehicles introduced in the 2015 budget are better than the old rules but this file should nevertheless remain open.  If real yields on the types of securities a prudent retiree should hold do not rebound considerably, and if life expectancy continues to rise, authors William B.P. Robson and Alexandre Laurin say the risk of outliving tax-deferred savings will continue to be material.

By the time new withdrawal limits were announced this year, the draw down rules established in 1992 were badly outdated. Lower yields on safe investments and longer lives had put many Canadians at risk of outliving their savings. The new smaller minimums reduce that risk.

With real investment returns of 3%, as assumed in the budget illustrations, C.D. Howe projections suggest relatively constant minimum RRIF draw downs up to age 94, and a lower risk of living to see a badly depleted RRIF account balance. However, real returns on safe investments are currently negative. Re-running the projections with zero real returns suggests that most seniors still face a material risk of outliving their tax-deferred savings.

The motive for forcing holders of RRIFs and other similarly treated tax-deferred assets to draw down their savings is to accelerate the government’s receipt of tax revenue, and likewise bring revenue from income-tested programs such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) forward.  These payments will occur eventually – notably on the death of the account holder or her/his spouse or partner – so they amount to an implicit asset on governments’ balance sheets. The draw downs do not affect their present value; they simply make them happen sooner.

The minimum withdrawals are not a serious problem for those who, perhaps because they do not expect to live long, want to draw their tax-deferred savings down fast. Others, willing and able to work and replenish their savings after age 71, will get by. Couples can gear their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. Higher TFSA limits will also let more seniors reinvest unspent withdrawals in them, avoiding repeated taxation.

For others, however, forced draw downs make no sense: those whose withdrawals – reinvested in TFSAs or not – trigger claw backs; those daunted by tax planning and investing outside RRIFs; those unable to work longer; and those facing sizeable late-in-life expenses such as long-term care. The more future seniors have ample assets to finance such needs as health and long-term care, as well as the enjoyments of retirement, the better off Canada will be.

Therefore, the report says the 2015 changes should be a down payment on further liberalization. In the alternative, if more regular adjustments to keep the withdrawals aligned with returns and longevity are impractical, it is suggested that eliminating minimum withdrawals entirely may be the best way to help retirees enjoy the lifelong security they are striving to achieve.

Robson and Laurin conclude that government impatience for revenue should not force holders of RRIFs and similar tax-deferred vehicles to deplete their nest-eggs prematurely. While the 2015 budget’s changes are a step in the right direction, they say retirees need further changes to these rules if they are to enjoy the post-retirement security they are striving to achieve.

Also read:
What the new RRIF withdrawal rules will mean for you

RRIF rules need updating: C.D. Howe

Nov 24: Best from the blogosphere

By Sheryl Smolkin

Do you typically buy a fistful of gift cards for holiday gifts? Just in time to save you a bundle, Boomer & Echo’s Rob Engen writes about How To Hack Gift Cards For Big Discounts. He suggests buying gift cards with your cash back credit card, the RedFlagDeals forum dedicated to buying and selling gift cards and purchasing discounted gift cards at Costco. Who knew?

On Retire Happy, government benefits expert Doug Runchey explains that Receiving a partial OAS pension affects the amount of GIS a pensioner will receive in two ways:

  1. A pensioner receiving partial OAS will receive more GIS than someone receiving a full OAS pension, to make up for their lesser amount of OAS.
  2. A pensioner receiving partial OAS will receive GIS up to a higher income, compared to someone receiving a full OAS pension.

Jonathan Chevreau on Findependence Day Hub profiles a 28 year old Winnipeg-based investor named Saxon Funk who has a firm plan for achieving financial independence through various passive streams of income. But his real play for findependence comes through real estate. He was attracted to real estate when he discovered he could buy properties at 10% down, and he caught the Winnipeg real estate cycle at just the right time.

Do you know How Your Daily Commute Affects Your Finances? Dan Wesley from Our Big Fat Wallet reports that the average time Torontonians spend commuting is 80 minutes – the longest time in the world. In contrast, Saskatchewan Jobs says the average commute time in the province’s two largest cities is only 20 minutes. Another reason to count your blessings!

And if unexpected, frequent required changes to eyeglasses for family members is putting stress on your budget, you may be interested in How I saved over 50% buying eye glasses online, my recent blog on Retirement Redux.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

BOOK REVIEW: THE REAL RETIREMENT Why you could be better off than you think

By Sheryl Smolkin

7Aug-The+Real+Retirement

The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.

However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.

Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.

In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.

Initially, they note that there are three phases of retirement:

Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.

Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.

Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.

As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.

I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.

They use the following population breakdown in their calculations:

Income Quartile Average total income (couple)
Quartile 1 $29,000
Quartile 2 $53,000
Quartile 3 $78,000
Quartile 4 $110,000
Quartile 5 $204,000

The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.

For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.

Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.

Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.

The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.

A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.

This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”

While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.

But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.

The Real Retirement can be purchased online from Chapters for $15.64.

Fred Vettese
Fred Vettese
Bill Morneau
Bill Morneau