Downsizing as a retirement strategy

A guide for the house-rich who are looking to cash in

Deanne Gage 28 April, 2011 | 6:00PM

Real-estate prices have reached record highs in many urban centres, to the point where some investors are betting on their house as their retirement nest-egg. The thought? Sell the family home, downsize to a smaller dwelling and bank the difference. But is this a wise investing strategy?

It depends on your circumstances and expectations.

Consider financial advisor Kevin Cork's clients, whom we'll call Bill and Candace. They spent their lives building their dream home and sacrificed other savings to pay for it. Now in their mid-60s, they planned to downsize to a $500,000 condominium in a new subdivision of Calgary. They would use the proceeds from their house sale to buy the condo.

Just one problem: They couldn't find a buyer for their $950,000 home. Several months later, Bill and Candace reluctantly sold the property for $850,000. But by then, the condo of their dreams had risen to $600,000. So, after real estate and legal fees and land-transfer taxes, there wasn't much money left.

"They originally came to see me to discuss what they were going to do with all the money after they sold the house," says Cork, CFP, with Absolute Group in Calgary. "As the months wore on, we had less and less to talk about."

Now, consider Cork's clients whom we'll call Sheila and Vince, a couple from rural Alberta who got high-paying jobs in Fort McMurray. They relocated to that booming city, bought a house and rented out several rooms in the house to help pay off the mortgage. By the time their jobs ended years later, Sheila and Vince were mortgage-free and keen to move back to their small town. So, they sold their house for $1.5 million, bought a place back home for $200,000 and netted $1.3 million.

"If you are comfortable moving into a lower-housing-cost area and that's part of your retirement plan, I think downsizing can work out well," Cork says. "But for most people, there's not a lot of gain to be made. In most cases, it's a straight swap. They may end up with a little extra but sometimes they have to spend a little bit more as well."

Here are some other issues to consider before downsizing.

Examine your primary reason for moving.
Is it for financial purposes or practical reasons, such as that your house is meant for a family of six, not one person? Perhaps your spouse has died and you want to move closer to your children or grandchildren. Are you travelling more, so not able to spend much time on upkeep? "It's hard to look after a house if you're gone three months out of a year," says Michael Berton, a senior financial planner with Assante Financial Management Ltd. in Vancouver.

Assess your current property's value.
Have a reputable real-estate agent do a comparative market analysis on your property. You may already know your home's market value, based on previous selling prices in your neighbourhood, but a second opinion to confirm or dispute your numbers can't hurt.

Figure out where you'd like to live.
What do you want your lifestyle to be like? Does an isolated lake community two hours from the city sound like bliss? Or would you prefer to be near all the amenities that an urban centre has to offer? Do you want to downsize to a smaller house or condo? Many prefer houses, according to the 2010 TD Canada Trust Boomer Buyers Report. The survey found that 61% of boomers who are considering downsizing plan to purchase a detached house. What's the appeal? Having a backyard/garden (61%) and not having to pay condo fees (57%). Still, just over half of boomers are considering a condo due to less maintenance of the property (84%), enhanced security (54%) and appealing amenities such as a pool or party room (47%).

Price it out.
Many people make the mistake of selling their house on a whim without first considering the costs of alternative living arrangements. Not surprisingly, they then find they can't afford what they want, says Diane McCurdy, president of McCurdy Financial Planning. A condo may have less space and hassle but not necessarily less cost, especially if you're moving from a rural or suburban area to the city centre. "A condo can be more expensive than running a house because you have condo fees and other fees can apply," notes Cork. For example, the condo board could decide it's time to replace the roof, and so all the owners have to pay their portion, say $25,000. In Calgary, Cork says some condo developments are only 25% occupied, so the fees are quadrupled to cover the maintenance costs of the whole building.

Test-live before you commit.
Perhaps you've dreamed of leaving your suburban home to move to a downtown condo where shops are only blocks away. Then, you sell your house, buy the condo and move in, only to discover you hate the city noise and pollution. That's why Cork recommends testing it out first. "Go spend a summer or five weeks there to see how stir crazy it makes you," he says. Alternatively, after you sell, Cork suggests first renting in your area of choice "so you can see what it's like when you're not doing all the fun stuff but getting groceries or finding a doctor."

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.