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Retirement Will you fund your retirement through home equity?

Retired couple in front of their house.

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Are you one of the many Canadians who did not make a contribution to your RRSP ahead of the March 1 deadline? Is it because you are bogged down by other debt, perhaps a hefty mortgage?

While it's become harder for first-time home buyers to get into the real estate market due to a long bull run in housing, the flip side is that a lot of people are sitting on some serious home equity. More than a few Canadians have pondered tapping into that equity to help fund retirement. It might be their only option.

According to The Investor Education Fund's "2013 Home Equity as a Source of Retirement Income survey," which interviewed 1,500 homeowners 50 years of age or older, two out of 10 don't even know how much retirement savings they have and "half of all households believe they will exhaust their retirement savings in the first 10 years of their retirement."

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There are various ways to tap into home equity. One could downsize into a smaller house and use the difference in price to supplement retirement spending needs. For homeowners who have upgraded their housing footprint over their lifetime to accommodate growing families, they will eventually find themselves with an empty nest and downsizing won't have them feeling pinched for space.

Others might forgo buying another house and opt instead to rent. There are plenty of neighbourhoods where house prices have accelerated faster than rents. That frees up more equity, but you have a higher cash outflow.

For those who don't want to move, they can borrow against their home through a home equity line of credit or a reverse mortgage. Of course, if you're retired and no longer enjoying the same income as during your working career, you'll need to factor that into your ability to repay your debts, or on your resulting estate if you have plans to transfer wealth when you die.

You can also do what first-time home buyers are increasingly doing in order to afford home ownership. Rent out part of the house. While they do it to get into the house, seniors might do it to keep from losing the house.

In all of these scenarios, what is clear to me is that they all benefit from planning in advance. Just like retirement. The sooner you can get started with a real financial plan, the more choices you will have whether you are 10 years into your career, or 10 years away from retirement.

Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.

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