Retirement involves a lot more than simply collecting a pension
By Wendy Haaf
Almost every homeowner will ponder the great existential question at some point: to downsize or not to downsize? Whether ’tis wiser to sell the house you’ve been living in for years and move to a smaller home or to forget the whole thing? And should one decide to downsize, the next conundrum is how to go about it.
We talked to experts about the potential pitfalls involved to help you avoid making those mistakes should you decide it’s time to downsize. Here’s what they had to say.
the Financial Benefits
“Selling your house and downsizing can be a brilliant way to free up a lot of cash, especially because when it’s your principal residence, there’s no tax on the sale,” notes David Trahair, a Toronto accountant and author of several books, including The Procrastinator’s Guide to Retirement.
For some, this creates the opportunity to invest in order to supplement retirement income. That was certainly the case for Dave Dineen of Waterloo, ON, who writes a retirement lifestyle blog for Sunlife.ca. “It was really a way of retiring early for me,” he says, “because about half of our net worth was tied up in real estate, and by downsizing, we got that down to about 25 per cent.”
Downsizing is potentially a way of cutting down on your living expenses, too. “All that extra space you needed when the kids were at home costs you more in utilities, property taxes, maintenance, insurance—everything,” Trahair says.
Jason Abbott, a certified financial planner with WEALTHdesigns.ca in Toronto, adds, “I’ve had clients downsize with the key driver being property taxes. They’re not emotionally attached to the house, and they’re just as happy being somewhere else, so they downsize.”
The catch? “You actually have to move—to a smaller home or to a less expensive area, from the city to the country, for example,” Trahair says. And there are costs involved in such a move that can eat into any potential profit.
“You need an agent, and then there’s land transfer tax, and you need a lawyer to close both deals,” says Joyce Wayne, an author and blogger (retirementmatters.ca) who moved into a high-rise condominium in downtown Toronto after retiring and selling her long-time home in nearby Oakville.
Another expense: new furniture. “I had to get rid of my old furniture because it looked ridiculous in a condo; it was the wrong size and style,” she says. “Because—at the back of my mind—I thought I might return one day, I put it all in a storage locker, which was another $200 a month.”
If you’re considering the condominium route, your future monthly outlay can be difficult to predict, as well.
“Condo fees are always going up,” Wayne says. “And that’s serious business. How can you budget for that, especially when the cost of everything else keeps going up?”
To get an accurate valuation of your current home, Ann De Bono, a sales representative with REMAX Advantage Realty in London, ON, recommends connecting with at least one real estate agent who works in your area. “You’d get two or three quotes on a renovation; why wouldn’t you get two or three quotes on what your house might be worth?” she says. “Then you can make an informed decision.”
Similarly, speaking to an agent who works in the location to which you’re thinking of moving will give you a more accurate idea of what you can expect to pay for the type and size of home or condo you’re hoping to purchase.
“Get yourself someone you can really trust, because agents really are key in the process,” Wayne stresses.
Trying to Predict Property Values
“A common question I encounter is, ‘Is now the right time to sell?’” Jason Abbott says. “There’s that element of ‘Get while the getting is good,’ though this housing market could stay strong for years or decades.”
On the other hand, he says, “I can’t ever suggest to someone that this trend is going to continue—it could stop tomorrow. So speculating on property values is probably the least of the reasons to factor into the decision. For people who have identified that they either no longer want the financial obligation or the upkeep and maintenance obligation of their current home, the decision is usually driven by finding the right place for them, whether that takes six months or two years, and never, ever by speculating on when the housing market is going to turn.”
No doubt Joyce Wayne would concur. When she bought her condo from plans eight years ago (four years prior to moving in), “there was a lot of hype in the business and real estate press about how great it was to downsize and move to a condo—sell your house now, because this is the last moment you’ll ever get as much out of it. Now they’ve been talking about that bubble bursting for something like 15 years.”
“To be really honest, I didn’t do much homework,” Wayne admits.
One area she wishes she’d researched in more depth: the key differences between purchasing a condominium and purchasing a house. For instance, you need to know if the condo’s reserve fund is likely to be sufficient to cover both foreseeable and unexpected expenses such as replacing a roof or repairing major damage caused by a leaky swimming pool; if it isn’t, you’ll be on the hook for your share of those costs.
Two resources that outline some of these potential pitfalls are The Condo Bible for Canadians: Everything You Must Know Before and After Buying a Condo, by Dan Barnabic, and the Canada Mortgage and Housing Corporation’s Condominium Buyer’s Guide, which can be downloaded for free from cmhc-schl.gc.ca.
One of the bits of advice Barnabic offers is: Check with the municipality to find out whether any buildings are slated to be erected nearby.
“When I bought my condo,” Wayne says, “I had a view of the lake and a view of the city; when I sold it, I had neither. In an environment like Toronto, you can’t anticipate who’s going to build outside your door. It’s not that I would never live in another condo—I would—but I would choose differently.”
Another situation in which it’s worth doing extra research—and perhaps having second thoughts—is when you’re considering a move to another part of the country.
For example, you might consider moving to be closer to your children.
“I’m not sure that it’s always a good idea to follow your kids,” says Sharron McMillan, a broker with Assist-2-Sell Homes Around London Realty Inc., in Dorchester, ON. “Sometimes it works out well, but if they’re raising kids themselves, it can put an additional stress on them.”
Or you could discover, on moving back to your hometown, that there are no longer people there who share your interests. Or that town that seemed so idyllic when you vacationed there may turn out to be unbearably wet, cold, or lonely in the winter.
Renting for a year is one way to test the waters without committing yourself to a permanent change. “We’ve run into people who’ve done exactly that to get an opportunity to see what life is like somewhere else,” McMillan says.
Heidi Mettler, a certified financial planner with Investors Group in London, ON, says she has seen this approach work well for some of her clients, including a couple who, after deciding to sell their home to supplement their retirement income, were unsure whether to buy again or to invest the proceeds and rent. Because they like to travel, and sometimes care for their grandchildren in another community while the parents are away, being able to lock the door and simply walk away without worrying about such things as security and lawn mowing was a big draw. Ultimately, they decided to defer a permanent decision and rent for a year.
“It’s only been four months, but so far, they’re loving it,” Mettler says. “Yes, renting is money out the window,” Mettler says, “but it also means not having property taxes, not needing to think about pool repairs, or a new roof every 12 to 15 years, or a new furnace every 20 years. It really depends on what your needs are.”
Miscalculating the Importance of Lifestyle
Joyce Wayne’s decision to downsize and move to a vibrant downtown neighbourhood once her daughter went off to school was driven partially by a desire to make attending cultural events more convenient. And while she did enjoy that aspect of her new home, she hadn’t counted on how much she’d miss having an office or a yard—after all, she wasn’t an avid gardener. “I bought a unit with a huge terrace thinking that would make up for the yard, but it didn’t at all,” she recalls.
Wayne also missed having the space to entertain more than she’d anticipated.
“I have friends who’ve had good experiences with condos, but they have two complaints: the lack of space and the fact condo fees keep rising,” she says. With her second bedroom set aside for her daughter’s visits home, Wayne set up her workspace in the living/dining area. “I thought, Well, I’ll adjust, but I didn’t.”
After two years, Wayne decided to sell and buy a house in Oakville. While her unit sold for about $100,000 more than she’d paid for it, the move left her worse off financially. “Downsizing cost me a lot,” she says. “It also left us with a mortgage. I’d had no mortgage on my house, but I had to buy back into the market,” and housing prices had risen much more than condo prices had. (Wayne’s downtown interlude wasn’t a total loss, however: that’s where she met her current partner and achieved her dream of writing a novel.)
Downsizing also turned out to be a multistep process for Dave Dineen and his wife, though at less of a financial cost. Initially, the couple sold their four-bedroom home, bought a condo, and tore down the family cottage to build a three-bedroom home that was suitable for big family gatherings and could be rented out for the rest of the year. But jumps in property tax on the lakefront property and time and money spent on maintenance ended up interfering with the Dineens’ ability to travel, which had been one of their foremost wishes for retirement. That spurred a move to a new bungalow in Stratford, ON—which turned out not to be the right fit, either.
For one thing, Dineen says, “I got really tired of shovelling snow.” For another, nearly all outings, such as shopping, required a car trip. A new condo in Waterloo, ON, where everything from their dentist’s office to walking trails, an indoor walking track, and indoor and outdoor skating rinks is within strolling distance, meshes much better with the active couple’s lifestyle. And while Dineen’s wife misses her garden, she’s weighed that against the added latitude to travel and visit far-flung family.
“We’ve stumbled around a little bit, seemingly, as we kind of found out what kind of lifestyle we’ve been looking for,” Dineen says.
“It hasn’t been so much about money for us as getting that balance and freedom. We’ve accomplished quite a lot by making sure that where we live, both financially and in terms of lifestyle and freedom to move around, gives us what we’re looking for. In my mind, the best reason to downsize is to improve your lifestyle, or to adapt to changes that are being forced because ill health or something comes along. In my experience, it’s not so much about saving money.”
Not Involving the Kids
“I think if children are involved, it’s always wise to include them,” Jason Abbott says, “not necessarily in the discussion of downsizing, but certainly to let them know that you’re considering it. For example, there are situations in which one child has a particular affinity for the house; rather than sell it to a third party, the parents factor that affinity into their plans and transition the home to one of their children. When the key driver for downsizing was financial, I’ve seen children buy the property and, in essence, rent it to their parents.”
Contrast that with the situation in which, too proud to tell their kids that they’re financially squeezed, parents quietly take out a reverse mortgage.
“There are many disadvantages to a reverse mortgage,” David Trahair says. “First of all, there’s not a lot of choice so you can’t shop around. You need an appraisal, and you need to talk to a lawyer, which is expensive. You’re charged interest at a higher rate than if you were taking out a regular mortgage, and the balance of that loan increases by this high interest rate every day that you’re holding it. So what has happened in the past is that seniors who are cash-poor but don’t want to tell their kids get a reverse mortgage, and when they pass away, there’s hardly anything left because the loan has built up to such an extent.”
“The key thing in a family is to start the discussion about downsizing early, even if nothing comes of it in the short term,” Abbott says. “It’s important to know what everyone’s wishes and intentions are.” If you’re dreaming of a funky city neighbourhood where you’ll rarely need a car and your partner is imagining an idyllic country retreat, it may take you a while to find a middle ground that appeals to both of you.
Considering the question earlier rather than later also gives you time to figure out what to do with all of the belongings that might not fit into a smaller home, a process that can be both emotionally draining and lengthy. “One of the things that was a shock to us was that no one wants your stuff—your kids don’t want it,” Dave Dineen observes.
“I’d suggest thinking about downsizing sooner rather than later,” Dineen says. “You want to be active enough to fit in well to your new community. A lot of people seem to leave it pretty late, so their ability to do that is diminished.”
Heidi Mettler has witnessed the wisdom of that approach with her clients, such as a couple with a nearly 20-year age difference who moved from a large house to a condo. The change took some adjustment for the husband, who, while the older of the two, was an active and energetic gardener.
“They made the decision together, and it worked out to be a good thing,” Mettler says, “because she passed away a year and a half ago, and he’s already established relationships with the community of people around him. He’s not on his own, in a new area, not knowing anyone.”
“It’s important not to isolate yourself when you’re older; in some ways, I think there’s nothing more important than that,” Joyce Wayne says.
According to a growing body of research, she’s quite right: loneliness and social isolation in later life has been linked to an increased risk for a host of health ills and is now viewed by experts in aging as being as detrimental as smoking is to younger people. “You need to have lots of activities, and friends, and people around you,” Wayne says.