Retire on your own terms

Tim Adeyemi. September 9, 2019

After a lifetime dedicated to your community and profession, retirement is your reward for a job well done. As we approach our 60s, we begin to imagine our lives with freedom from work, filled with time to pursue our passions and hobbies.

In the middle of planning for this desired future, we are reminded that we still may have financial obligations to worry about, and a declining income to meet them.

Relatives and financial advisors are quick to offer the easy solution of downsizing our homes, but this often ignores the human and financial costs of downsizing. As for financing retirement through debt, it is often viewed with apprehension by our well-wishers. Although many of these fears are real, some forms of debt may provide seniors with the ability to live their retirement years with serenity. This peace of mind is dependent on seniors selecting the right lending product to meet their needs.

The negative stigmas associated with seniors having inadequate finances for retirement, and living in debt, often act as a deterrent for many seniors seeking debt to help maintain their lifestyles. Let’s evaluate each of these concerns in detail.

This stigma that these seniors failed to properly prepare for the future, or were financially irresponsible in their early years, doesn’t take into account the socio-economic issues facing working adults in the lead up to retirement. Many face the increased financial burden of supporting two groups of dependents: their children and their parents. 72% of parents say they often put their children’s needs ahead of their own retirement, according to a National Reverse Mortgage Lender’s Association survey. According to the survey, many parents provide financial support to their adult children. This can range from something small like paying their child’s phone bills, to covering larger costs like tuition, or providing a down payment for a home. These sorts of costs are rarely questioned, due to the special close ties of the family unit.

Longevity is another factor that contributes to seniors having inadequate financial resources at retirement. Thanks to advances in medical science, many Canadians are living well into their 80s and beyond. This increase in average life expectancy—while a positive change—has the unintended consequence of making it harder for people to plan for retirement.

A World Economic Forum report found that the retirement savings gap¹ (the gap of years between when retirement savings are predicted to run out and life expectancy) was ten years for Canadian men, and around thirteen years for Canadian women. Some have advocated working for several more years before retirement as a way to close this gap, but working longer involves increasing physical and mental challenges as we age, and therefore may not be a feasible solution.

A popular way to close the retirement savings gap is downsizing. This might appear to be a wise solution on the surface, as most seniors live alone and will not need as much space now that their children are no longer living in the home. This solution, however, often ignores the hidden financial and emotional costs related to downsizing. Leaving a home where there are so many memories can be difficult. Downsizing could also mean there is less space for visiting relatives, which could reduce quality time with family. By moving away, seniors may also lose the social circle and support systems that they have built over the years. Downsizing may also involve giving up some possessions for the sake of decluttering, possessions that may have important sentimental value. Another consideration is that moving often involves extra costs, such as real estate commissions, closing fees, and moving fees. To be comfortable in new surroundings, seniors may also need to make renovations.

Financial security is another major concern that seniors may have when considering using debt to finance retirement. A CBC report stated that 20% of retirees are still paying off their mortgages, and 66% still carry credit card debt. Seniors are also more likely to default on new debt due to their declining income.

Borrowing against your home’s equity, which is likely your most valuable asset, is one solution that could work. Most people have built equity in their home over their working lives by paying down their existing mortgage. Tapping into and using this wealth is an appealing alternative to downsizing. Equitable Bank offers two options to take advantage of this existing wealth: our Home Equity Line of Credit (HELOC), and an Equitable Bank Reverse Mortgage. While HELOCs tend to have a lower interest rate than reverse mortgages, clients still have to make monthly payments, which could increase the financial burden they face. Reverse mortgages, on the other hand, do not require monthly mortgage payments. A reverse mortgage typically matures in the event of the death of the borrower, when a borrower moves out of the principal property, or when a borrower defaults on the loan. The total repayment amount will never exceed the market value of the home. This product enables retirees to stay in their current home without having to worry about monthly financial obligations.

Retirement planning is difficult, and no matter how well a person prepares for it, there may be extenuating factors that result in a gap in savings to cover their retirement years. While downsizing a home might seem like a prudent option to finance retirement, this often costs retirees precious memories, sentimental items, and social contacts. Reverse mortgages offer homeowners the option to acquire tax-free cash, stay in their home, and retire on their terms.

¹ https://www.weforum.org/agenda/2019/06/retirees-will-outlive-their-savings-by-a-decade/