Renting after selling the family home requires a big attitude adjustment.
There’s more to it than no longer being an owner. A downsizing senior has most likely gone a decade or more without making mortgage payments. Renting brings back a commitment to paying a large chunk of money every month for accommodation.
A reader recently suggested an idea for making rent less onerous: Take some of the proceeds from the sale of the family home and use them to buy an annuity that pays all or part of monthly rental costs. This money could be used in the near and medium term to rent a suitable home, and then later on to cover part of the cost of a retirement residence, a long-term care facility or home care.
Let’s say you aim to get $3,000 in rental costs covered by an annuity. A mid-July survey of the annuity marketplace shows a 65-year-old male would need to put between $495,371 and $514,846 into a non-registered annuity to generate that much money each month. This is a basic annuity that pays you nothing if you die suddenly after buying. The cost of an annuity paying $3,000 a month for a guaranteed 14 years (to you or your estate) would range from $522,156 to $560,891. The significance of 14 years is that’s how long it would take to get all the money you put into the annuity back through monthly payments ($3,000 x 12 x 14 = $504,000).
An ideal choice for this strategy would be a non-registered prescribed annuity, which offers a better after-tax payout than an annuity held in a registered retirement income fund. In the previously mentioned quotes for an annuity with no guarantee period, the monthly taxable portion of payments would range from $718 to $796.
Prefer a smaller annuity commitment? Let’s say you’re a 75-year-old male and want to generate roughly $1,000 in monthly annuity income. Royal Bank of Canada’s online annuity calculator showed in late July that buying a $150,000 annuity would give you annual payments of $12,541, or $1,045 per month. That’s easily enough to pay property taxes and utilities.
What I like about this idea for covering housing costs is that it highlights the potential for strategic use of annuities to provide a guaranteed slice of your retirement income needs. Decide how much income you’d like paid to you as long as you live, and then find out how much you’d have to put into an annuity to generate that amount. Adjust as required to leave you with meaningful annuity income and plenty of retirement savings left over after buying the annuity.
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