Downsizing for Retirement in Canada

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Canada Pension Plan (CPP) and Old Age Security (OAS) often only substitute a modest portion of your preretirement income. Thus, many people have to reduce their expenditures after retirement.

In simple words, downsizing means selling your current larger home and moving into a smaller sized home, often a townhouse, condo or a small bungalow. Retirees are often left with unused space after their children have moved out. It can become increasingly difficult to maintain large homes due to the health implications of aging and it might be a good idea to trade the extra space for more flexibility, convenience or money. Downsizing can come in different forms and could also mean:

• Moving to a retirement community
• Moving to a locality with a lower cost of living
• Renting a condo or apartment
• Moving in with a child
• Moving into an assisted living facility if you have health issues

While downsizing may seem like an obvious choice for a lot of retirees, it needs a lot of time, effort and careful planning. As indicated in an Ipsos Survey from 2018, 91% of downsizers agree (65% strongly agree/27% somewhat agree) that they are happy with their living arrangement. However, what also came up in the study was that 27% downsizers felt that the costs incurred were more than they expected. Therefore, you must evaluate your individual circumstances and assess what downsizing your home for retirement could mean for you.

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Downsizing can be a major life decision for many and it is important to account for its emotional and financial implications. You must assess if this decision aligns with your financial goals and the lifestyle you want after retirement. It is important to make an informed decision to avoid making any mistakes that you could regret later. Following these steps could make this journey easier for you:

Step 1: Evaluate your reasons for downsizing

Before getting into the process of downsizing, you must ask yourself why you want to downsize and evaluate the pros and cons. Here are some questions that might help you make your decision:

• Is your current home suitable for a retired lifestyle and can you maintain your current house for the next 20-30 years or be able to afford help for doing so?
• Do you need to be cared for by your children / relatives and need to move closer to them?
• Do you want to live in the same locality or city or are you willing to relocate to another place?
• How much space do you need and what kind of a property would be easy to navigate when you’re older?
• How would downsizing impact your day to day expenses (bills, taxes and maintenance costs)?
• Are you emotionally ready to part with your home and possessions that you might have had collected over decades?
• How much time and effort are you willing to invest in the process?

Step 2: Calculate the costs

One of the most common reasons for downsizing after retirement is to reduce expenses. Retirees often live on less income and being financially independent at an older age may be a key motivation for downsizing. Factoring in all the financial implications would help you make a sound decision about downsizing. The following steps may be helpful:

• Find out what your home is worth

  The current worth of your home depends on factors such as its age, condition and location. It might be a good idea to talk to several real-estate agents in your locality or get a home appraisal done by a professional. It is best not to depend on the word of a single realtor or just go by the value of properties sold in your neighborhood. Once you know how much money you can get by selling your home, you would be able to decide how much you would spend on your new home.

• Budgeting for your new home

  Once you know what your current home is worth, you could set a budget for your new home. This would be key in determining how much money could you free up from your current home’s equity. While budgeting, you must also consider associated costs such as condo fees that may be a part of your recurring expenses. Some people choose to move to a locality with a cheaper cost of living to cut down on expenses and make their money last longer.

• Repairing or renovation costs

  You may need to fix up your home before you decide to sell and these costs need to be accounted for in your downsizing plan. This could mean getting a fresh coat of paint on the walls or changing some fixtures to even full fledged kitchen or bathroom remodeling. Before making these decisions, you must speak with an expert to understand what could give you a good return on investment. This would ensure you don’t end up making any unnecessary expenditure.

• Selling and Buying Costs

  There are several costs involved in selling a home and also in buying a new one. These costs often include realtor commission to be paid when selling your home (usually around 5% of the selling price) and closing costs that commonly include (but are not limited to) legal fees, title insurance and land transfer taxes.

• Moving costs

  When moving to your new home, you might have to hire professional movers to move your belongings. Additionally, you may have to buy new smaller furniture if your existing furniture can’t fit into your new home. You may also need to rent a storage unit if you want to hold onto your belongings which can’t fit in your new home. All these costs must also be taken into consideration when you plan for downsizing.

Step 3: Take some time to plan everything

Once you are sure about your downsizing decision, you need to start planning your move. Making a plan and sticking to it could make the process of downsizing much smoother than just jumping right into it. You could start by setting a deadline for moving and deciding on the type of property and location to move. Looking at MLS listings could be a good way to start your research. Your plan could include a set timeline for fixing up your house or other such tasks. You could also plan if you want to sell first or buy first depending on your financial situation and other factors such as having a temporary place to live if you’re still looking for a new place after selling. If you still owe a mortgage, this may be a good time to talk to your lender and assess your options.

Step 4: Donate or sell what you don’t need

You are likely to have collected a large number of possessions over the years that you might not be able to fit into your new smaller home. Donating or selling these possessions can help you declutter and reduce the number of things you need to worry about while moving. This could be an emotional ride and may take several months, and therefore it may be a good idea to start this process well before you plan to move. Selling some of your items may also help raise some money that could offset your moving costs. Some people also consider hiring professionals to help them with this process.

Step 5: Sell your home and find a new one

This could be a simultaneous process for some while it may be a two-step one for others. You could talk to several realtors and decide on someone (sometimes different agents for buying and selling) you find trustworthy. You also need to zero down on a real estate lawyer to help with the legalities. It could sometimes be beneficial to go with agents and lawyers recommended by friends and family. While choosing your new home, you need to ensure that it fits your budget, lifestyle and possible future mobility limitations. It is vital to be realistic about your requirements for the next 20-30 years.

Step 6: Move to your new home

Once you have sold your old home and found a new one, it’s time to move. You could consider hiring professionals to do so or do it yourself with the help of friends and family if it’s practical and you have enough time to do so.

After evaluating your circumstances you may feel that downsizing may not be the best option for you. For example, you might have to move far from your current locality in order to make your finances work, which would distance you from your loved ones or community. In such cases, you may want to consider other substitutes such as:

1. Rent your home or a part of it

   If you have a spare room that you are willing to rent, it could become an additional source of income for your retirement. Alternatively, you may choose to live with your family or in a smaller rental home while renting your current home to tenants. In such a situation, you should be aware of your rights as a landlord and should ensure that you are protected by landlord insurance.

2. Reverse Mortgage

   If you have accrued substantial equity in your home, you may be eligible for a reverse mortgage of up to 55% of your home equity. This is the opposite of a conventional mortgage, where instead of you paying monthly mortgage payments to a bank, the bank will make payments to you while your home is serving as collateral. Reverse mortgage rates are considerably higher than conventional mortgage rates.

   You can use WOWA’s reverse mortgage calculator to learn how much of a reverse mortgage you may qualify for. These payments are tax-free and could be paid in a recurring manner, a one-time payment or a combination of both. The reverse mortgage doesn’t need to be paid back unless the last homeowner sells, moves or dies.

If you need help understanding your options or are confused with your calculations, talking to a financial advisor may be worthwhile.

There can be several financial, practical and emotional benefits that can come with downsizing after retirement. For example, a couple decides to sell their detached home in Toronto and buy a condo in the same area. The average sold price for a detached house in GTA in Invalid Date was $ while the average sold price of a condo was $. Conservatively assuming that the couple sells their current home for $NaN and buys a condo worth $ NaN makes for a whopping difference of $NaN. After subtracting the agent fees, closing costs and other associated expenses, the couple can still expect to be left with approximately $NaN. This way the couple could free up a substantial amount of money from their home equity which can be used for their daily expenses, investment or travel.

At the same time, statistics suggest that nearly 50% of Canadians over the age of 75 are living with a disability while public health surveys suggest that 73% of Canadians over the age of 65 suffer from at least one of top 10 most common chronic diseases. Continuing to live in the same home might incur expenses such as installing staircase lifts, walk-in tubs and safety alarms that could cost you anywhere from $5,000 - $15,000 on average. Downsizing on the other hand could address mobility issues while also reducing the burden of housework and maintenance which can be beneficial for most seniors.

Other common benefits why retirees choose to downsize are:

• Option of moving to another province or city of your choice.
• You could move to a place with better healthcare facilities and amenities.
• Reduce expenditure on bills (Hydro, heat, property taxes).
• Pay off debt or mortgage.
• Move closer to loved ones.
• Snowbirds who spend a lot of time away may need only a small place to call home and can save on costs associated with maintaining a bigger home.

Even though the benefits of downsizing your home for retirement might sound very compelling, you must account for the costs attached to downsizing before you make the decision to go ahead.