Renting is better value for retirees in some cities, such as Toronto.Fred Lum/The Globe and Mail
The idea of switching from home ownership to a rental can carry a lot of stigma for retirees.
Adam Chapman, a certified financial planner in London, Ont., said people who are retiring today likely generated an enormous portion of their wealth through home ownership. That can create a mental block when he advises his clients on how to approach downsizing.
“This idea of not being engaged in something that has created a lot of wealth makes them nervous about the future, and that they’ll run out of money because they don’t own a house,” Mr. Chapman said.
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Many retirees who are downsizing think their default option is to purchase, but financial planners don’t always consider ownership the best lifestyle option. It may not even make the most sense financially.
“Old school wealth beliefs sometimes hold retirees back from living a better retirement, having more income and being able to do more while their health is still strong,” Mr. Chapman said.
On the other hand, owning a home can benefit some retirees who value the stability, wealth generation and the independence it offers.
The Globe spoke to three financial planners who work with retirees who are navigating this exact scenario to help answer the question: Should you rent, or should you buy?
Using funds from a home sale as income can be more tax effective than RRSP withdrawals
If you choose to sell your primary residence and start renting, chances are you’ll receive a windfall. Mr. Chapman says that you can use this cash as income, and much of it will never be reported as such to the Canada Revenue Agency.
That’s because the money from the sale of a primary home isn’t considered income and isn’t taxed. Furthermore, if you put the money in a tax-free savings account, you can invest that money and withdraw those gains without declaring it as income as well. If you’ve already maxed out your TFSA, you could invest that money in a non-registered savings account.
That account would be subject to capital gains, but the taxes you’d face on that money could be relatively low, especially compared with withdrawals from a registered retirement savings plan.
Imagine this simplified scenario in which some forms of investment income such as dividends aren’t factored in: You put $1-million of cash from a home sale into a registered account, and it grows by 20 per cent over a few years. If you withdraw $50,000, only 20 per cent of that withdrawal is subject to capital-gains tax, which would count toward your income. And since capital-gains tax applies to 50 per cent of your gain, a small portion of your withdrawal would actually be reported as income to the CRA.
This can help keep you in a lower tax bracket, especially if you’re already receiving a pension.
That’s vastly different from a withdrawal from a registered retirement savings plan, in which the entire amount is considered income.
“Retirement becomes one of the few times you can create a higher take-home income than you actually show to the CRA,” Mr. Chapman said.
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Your housing decision should be based on lifestyle, not financial gain
How much responsibility do you want to have on your shoulders as you age? And how long will you be able to age in place in your home, which may or may not accommodate future health changes? These are questions that could be more important than financial considerations, says Julie Seberras, head of wealth planning and practice management at Manulife.
It’s easier to get out of a rental apartment if your health deteriorates or if you need to move into an assisted-care facility. Selling a home can be more challenging, especially if the market is slow.
“Ideally when you sell your house you want to be able to choose the right time for the market, and the right time for you mentally,” said Ms. Seberras.
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Selling your home can also free up cash flow for things like travel, early inheritance and holiday homes without using products like reverse mortgages to tap into your equity.
For people who want to own their home, Ms. Seberras said retirees should consider whether they have family members who can help out with the responsibilities or unforeseen circumstances that come with owning a home.
Renting is simply better value in some cities
In Canada, the de facto belief is that home ownership is simply better value. But Mr. Chapman said this is no longer true in some Canadian cities like Toronto, where renters can come out ahead.
“What a lot of people fail to realize about the shift to renting is the bills and costs that are associated with ownership are gone, and you have a giant sum of money that can now produce an income,” Mr. Chapman said.
He cited a recent analysis by Benjamin Felix, head of research and client education with PWL Capital, which found that renters could come out ahead over a period of 20 years in cities like Toronto, Hamilton and Ottawa, because diligent investing can outperform housing markets.
Look for stability, but also flexibility
Jennifer Watson, managing partner of Watson Investments in Oakville, Ont., says she considers home ownership a safer bet financially, and most of her clients tend to choose that option.
One reason is they prefer the relatively stable monthly cost of ownership.
One concern for renters is that if they are forced to move out after 10 years (either because of mobility issues or because of their landlord), they could face much higher monthly costs in their new home.
Ms. Watson advises anyone who is switching to renting to ensure they invest the proceeds from their home sale so those funds could be used for higher rents down the road.
For homeowners, values in a community will shift at similar levels, and selling one home and moving to another can sometimes be easier.
Mr. Chapman adds that renters who need accessibility features such as a door for their bathtub may not be allowed to make those changes in a rental.