Wanda Morris, at work in Surrey, B.C., started working with a financial advisor after she sold her North Vancouver home.BEN NELMS
Wanda Morris always knew that, at some point, she and her husband would sell their house and move into something smaller – and less expensive. In September, the vice-president of CARP, an advocacy group for older Canadians, did just that, selling their 60-year-old home in North Vancouver, which had climbed in value since they bought it in 1998.
Ms. Morris and her husband moved into a smaller, brand-new townhome in White Rock, B.C., partly to ease their commute to work and partly for better weather. (North Vancouver gets much more rain, she says.)
After they came into some extra money from the sale of their home, they decided they needed a financial advisor. They hadnʼt been using one before. They found a fee-for-service financial planner to ensure the money they made on the sale is in good hands.
“We’re evaluating our investment options right now,” Ms. Morris says.
As baby boomers downsize, many in cities such as Toronto, Calgary and Vancouver where real estate prices have soared, they’re left with new-found funds.
Many, though, have never used a financial advisor – rising home prices and, with a couple of gut-wrenching exceptions like the 2008 financial crisis, nearly three decades of rising stock prices, have allowed some people to save without any real guidance.
That may have worked until now, but managing a big windfall from the sale of oneʼs home – the largest asset most people will ever have – is a different story.
“We see it all the time that baby boomers are saying ‘We don’t need this space. How can we convert bricks and mortar into convertible assets?’” says Mark Coutts, a Sun Life Financial advisor. “We have people sitting on large sums of money and all these great ideas pop into their head. We should take an around-the-world trip. We should give money to the kids.”
His advice?
“Hold on, slow down and very logically itemize your needs and your priorities,” he says.
Ian Black, a Vancouver-based financial advisor with Macdonald Shymko & Co. Ltd., says home-related windfalls usually fall into two categories: People near or in retirement who want to fund part of their golden years with the proceeds from the sale of a home, or clients in their 80s who need to sell a house to move to a retirement facility.
“They may need those funds to pay for retirement home,” Mr. Black says.
Ultimately, both groups need help managing their money. Here’s what you need to know if you do come into a real estate-related windfall.
Be realistic
One problem people face is underestimating the cost of a new home, while thinking they’ll make a mint off the sale of their existing home, Ms. Morris says. “People often overestimate how much they’ll make cashing out,” she says.
Many falsely believe that a condo will be significantly cheaper than a house, she adds. In cities such as Vancouver and Toronto, the difference may only be a few hundred thousand dollars and once you buy, you’ll have to pay monthly condo maintenance fees, which can be hundreds of dollars a month. Do your research before you list your property to avoid sticker shock, she suggests.
Use your funds for long-term living
Run the numbers to ensure you have enough money for the rest of your life, says Mr. Coutts.
“You need to sit with an advisor to make sure you’ve done a retirement forecast, that it has been stress-tested for the unforeseen things like health issues, as ill health can derail your plans and lead to costly long-term care.”
He also suggests couples think hard about what kind of retirement they want to have – and then use their savings accordingly.
“Two generations ago, people were happy with a glass of lemonade and a rocking chair on the porch,” Mr. Coutts says. “Now it’s an entirely different story. They want to take surfing lessons in Hawaii.”
Factor in the taxes
“For most people, all their other income sources are taxable,” Mr. Coutts says. That includes money from the Canada Pension Plan (CPP), workplace pension plans and registered retirement income funds (RRIF).
The growth on any money invested after the sale of a home, especially if it’s put into a non-registered account, is also taxable – and this can put someone into a higher tax bracket.
“Now we have to figure out what’s the best combination of income sources to use, and in what sequence, to minimize the tax hit when you retire,” Mr. Coutts says.
It can be a good idea to put any proceeds into tax-sheltered accounts, such as a tax-free savings account (TFSA) or a Registered Retirement Savings Plan (RRSP), though there are maximum contribution limits that must be adhered to.
Get creative with investments
Also consider using tax-friendly investment vehicles, such as corporate class or tax-efficient (T-class) mutual funds, Mr. Coutts says.
T-class funds allow investors to withdraw capital first, instead of tapping into investment growth, when creating a monthly income stream. Since you’re withdrawing the capital, there is no tax owed. Growth is deferred until there is no capital left.
Consider gifts
If you have grandchildren, and don’t need the money from the sale of a house yourself, you may want to put money into RRSPs for them, says Mr. Black, or give your kids money to help purchase homes. This can help to reduce the portion of your estate subject to probate fees after you pass away, he says.
You can also give some of that money to charity, but “don’t start building your legacy if you don’t take care of yourself first,” Mr. Coutts advises.
“This is the first time that we’ve seen in a couple of generations that the real estate market has led to this once-in-a-lifetime opportunity for many Canadians,” Mr. Coutts says. But it’s “only an opportunity if you take the proper steps to create a plan to make the most of those dollars.”
As for Ms. Morris, she’s happy with their decision to downsize.
“We are in a very fortunate situation,” she says.
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