Need retirement funds? You’re not alone

Osman Aziz. September 9, 2019

Much of the conversation on financial media platforms focuses on retirement. These discussions often centre around the amount of retirement savings needed to live comfortably, and caution against accumulating debt in your retirement years. What this commentary fails to consider are the curve balls that life can sometimes throw at you: family emergencies, unexpected deaths, injuries, job turnovers, and poor investments, just to name a few. Each of these events can have a severe impact on your financial well-being, and could cause you to dip into resources you had intended to use later in life.

If this is the case for you, you’re not alone—many others are in a similar predicament. A recent report from RBC stated that the average boomer is $275,000 short of the amount they want to have saved for retirement. The findings were based on a sample size of 900 people, all aged 50 or over, with $100,000 or more in investible assets.1

The expected income shortfalls from the survey differed based on province:

BC AB ON Canada
How much respondents think they will need for retirement $958k $1.1mm $1.0mm $949k
How much respondents have saved for retirement $719K $821K $719k $674k
Shortfall $239K $279K $291K $275K

The amount of savings required to live comfortably in retirement has grown for two primary reasons: inflation, and increased life expectancies. That is to say, the cost of living has increased faster than wage growth, and people are now living longer than in previous generations. The dual impact of this amplifies longevity risk—someone outliving their financial assets. These factors, along with consistent debt accumulation, have affected the expected shortfall in savings for retirement.

To make up for that expected shortfall, this is how respondents to the survey expect to increase their retirement income:

  • Downsize/move—52%
  • Continue working in retirement—41%
  • Borrow against home equity—25%
  • Expected inheritance –21%
  • Win the lottery –3%

Downsizing in retirement may not be the best solution for making up your shortfall. Staging and preparing your home, realtor commissions, lawyer fees, land transfer taxes, and the physical costs of packing and moving your items to your new residence can all eat up a considerable portion of your home’s net sale proceeds. The emotional costs of moving should not be ignored either, as the support and sentimental value of your community may be difficult to replicate in other areas.

Working in retirement also may not be ideal. Depending on how labour-intensive your career is, this could have greater physical impact on your health as you age. Expecting an inheritance is also a passive strategy that has an uncertain timeline, as you must wait for the triggering event to occur. As for winning the lottery, your chances of hitting the jackpot are about one in 45 million.

Borrowing against your home’s equity, which is likely your most valuable asset, is one solution that could work. You can obtain access to these funds in a few ways: through a mortgage, a Home Equity Line of Credit (HELOC), or a reverse mortgage. The first two require income to service, and you’ll need to make mandatory periodic payments. A reverse mortgage is a long-term financing option that may be a suitable solution to your retirement funding shortfall needs, as this product allows you to extract a portion of your home’s equity tax and payment free. As you’ll continue to own and live in your home with a reverse mortgage, you will never be forced to move or sell your property as long as you live there for at least six months per year, maintain your residence, remain current with your property tax payments, and not otherwise default under the mortgage. Equitable Bank’s no-negative equity guarantee also ensures that you will never owe more than the fair market value of your home.

The proceeds from the reverse mortgage can help you live comfortably through your retirement, making up for the expected retirement funds shortfall without waiting for an inheritance, moving away from your community, or hoping for a lottery windfall.