Ontarians Relying on Home Values for Retirement: Study

"Trees don't grow to the sky." In the investment world, that's a common saying referring to the idea that stock prices don't increase indefinitely. It's an expression some homeowners may want to keep in mind when it comes to retirement.

According to a recent study by The Ontario Securities Commission (OSC), nearly half of pre-retirees — people aged 45-54 — living in Ontario are counting on the growing value of their home to pay for retirement.

Like any investment though, real estate values fluctuate. As homeowners, it's natural to feel richer when they move up. But what happens if house prices drop just as we head into retirement? We have no control over this. Unlike stocks or bonds, which can usually be sold more quickly to raise cash, real estate is a relatively illiquid asset. In a housing slump, it can take time for a buyer to materialize.

“Owning a home is not a substitute for retirement planning," the OSC cautioned in announcing the results of its study. It reinforces the importance of considering other sources of retirement income beyond home ownership.

Continued hot housing markets, particularly in Toronto and Vancouver, prompted the Bank of Canada governor to say in April that, "It's time we remind folks that prices of houses can go down as well as up." Canadian households borrowed $27.5 billion in the first three months of this year, and nearly $21 billion was for mortgages — an increase of $2.7 billion over the previous quarter.

The OSC found overall that a quarter of Ontario residents aged 45 or older rank retirement as their top financial concern. That includes concerns over having enough money for retirement, planning and saving for retirement, and maintaining a quality of life in retirement. Still, almost 38 per cent of pre-retirees who own their home have no investment savings, the OSC found. "The smaller the amount of investment savings, the more likely the pre-retiree is to rely on an increase in their home' value to finance their retirement," it said.

Retirement Foundations

In light of the OSC findings, how do we move beyond relying on higher house prices as the foundation of a solid retirement? Here are four considerations to help prepare for retirement:

1. Create a retirement plan that includes minimum and maximum estimated spending amounts in retirement. According to Statistics Canada data cited by the OSC, the average 65-year-plus retired household spent around $55,000 in 2015, about half the average amount spent by pre-retiree households aged 40-54.
2. List all expected income sources in retirement. These might include plans such as registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs), tax-free savings accounts (TFSAs), locked-in retirement accounts (LIRAs) or life income funds (LIFs), benefits such as Old Age Security (OAS) and the Canada (or Quebec) Pension Plan (CPP/QPP), annuities, etc. You might also be planning to have some part-time income from a post-retirement career or hobby. Once laid out, you can determine if there's a gap that needs to be addressed.
3. If you're a homeowner, calculate a conservative estimate of your home's value by the time you retire. Determining if, when and how you might unlock the equity in your home will help determine how your home might contribute to your retirement plan. Do you expect to downsize, borrow against the equity in your home or lease it for rental income?
4. Diversification. Financial experts often say asset allocation is the key to good investing returns. Allocating investments among different asset groups, such as fixed income, stocks, cash and real estate, while taking into account your age, time horizon and risk tolerance, can help mitigate the risk that any one of these groups may underperform for a period of time.

Find More Retirement Resources:

Goal: Planning for Retirement

Three Steps to Planning Your Retirement

Financial Considerations for Retirees