As we get older, many people want to stay at home as long as possible. This often means modifying your home or even finding a new home that is more compatible with your needs. But this comes with costs. How to finance this type of project? Even if you have the necessary savings, it can be complicated if your investment strategy is not compatible with your needs.
Position
France*, 66, retired a year ago. She lives alone in a two-story house. “Stairs are starting to be a concern and I would like to move into a bungalow suitable for an elderly person with a large bathtub, non-slip floors, gas fireplace, etc.,” she recounts.
France estimates that this type of house sells for about $500,000. She wonders if she can afford this purchase with a lifestyle of about $40,000 a year, which is a little more than she currently lives. “Is it reasonable for me not to want to use my savings before I turn 95?” she asks. »
Another option is to remodel her home: the cost of the work is estimated at about $150,000. “Can you help me figure out the most useful solution?”
Numbers
France*, 66 years old
Home: $280,000 fully paid
Quebec Pension Plan (QPP) pension: $630 per month, claimed at age 60
Annuity from the Retirement Fund: $2,100 per month, linked to living expenses
Old Age Security (OAS) pension: deferred until age 70
Registered Retirement Savings Plan (RRSP): $141,000 with various maturities
Tax-Free Savings Account (TFSA): $88,000 with various maturities
Unregistered investments: $270,000 with different maturities
Checking Account Cash: $10,000
Debt: $0
Expensive decisions
When Hadi Ajab, an independent financial planner and group savings representative with PEAK Investment Services, first looked at France's case, he thought the solution was so obvious since it had the savings to fund his project that he didn't see the point. Write a newspaper article on this topic. So dig a little…
First, he asked whether appointments from France were now available. This is where things get wrong.
Photo by Martin Tremblay, Press Archive
Hadi Ajab, independent financial planner and group savings representative for PEAK Investment Services
“France has many guaranteed investment certificates [CPG] With a total of 55 due dates, he wonders. This is very difficult and, above all, means that the vast majority of his money is not available to finance his project. »
Taking deadlines into account, he points out that she would have to wait until June 17, 2031 to have enough cash to renovate her home while still providing a lifestyle of $40,000 a year. “It's an aberration in my eyes,” says the expert. His investment strategy is not at all suitable for his needs. »
He also sees a tax issue. “The majority of what it has in its non-registered investments are interest-earning SVCs,” he says. However, the interest is taxable at 100%. But she has nearly $40,000 of stock money in her RRSP that gives a 50% taxable capital gain. It would be better to have these stock funds as non-registered investments and GICs in your RRSP. »
Hadi Ajab also highlights the fact that she applied for her pension from the Quebec Pension Plan (QPP) at the age of 60. “She was penalized 36% because of that decision: she would have received $1,070 a month if she had waited until age 65,” he explains. This difference of $440 per month is significant, especially since she did not need it because she was working part-time at the time. She also does not suffer from any particular health problems that reduce her life expectancy. »
Since this year, it is also possible to defer the QPP pension until age 72, increasing it by 58.8% compared to the amount expected at age 65.
According to the financial planner, these decisions that were taken show that France was not advised at all, or was not advised at all. Fortunately, despite this, there is a way to realize your project.
Option to buy a new home
It seems that France prefers to buy a new property for $500,000. To implement this project, you would not need $220,000 if she sold her house for $280,000.
“In 2024, she will have $129,000 available if we look at what she has in her checking account, her TFSA, and her non-registered investments,” says Hadi Ajab. Once you pay the tax on the withdrawn amount, then approximately $20,000 in notary fees, moving taxes, and moving-related expenses, and then set aside amounts to achieve a lifestyle of $40,000 per year, there will be about $90,000 left over. »
With what she would get from selling her house, we come to $370,000. Therefore there will be $130,000 left to collect.
“I asked a mortgage broker how much a person earning $32,760 a year could expect to receive in a mortgage loan if they had a good credit score and no other financial obligations,” the financial planner explains. It's only $100,000. »
To get the necessary amount, she will have to increase her income. “She can do this by applying for her pension from the Organization of American States [Sécurité de la vieillesse] Which, deferred for a year, would amount to $764.70 per month taxable, notes Hadi Ajab. But it's worth thinking about because the OAS pension increases by 7.2% every year if you postpone it until age 70. The mortgage will have an interest rate of about 5%. »
France will then have to consider repaying its mortgage loan within its cost of living. “By hiring a financial planner to create an accurate disbursement plan, she can achieve this while maintaining sufficient assets until the end of her days,” says Hadi Ajab. A healthy 66-year-old woman has a 25% chance of living to age 96 according to the Financial Planning Institute. »
However, he stresses that moving takes a lot of energy, that buying a new home comes with an element of unknowns, and that it's also possible that you'll have to put in the work there. “It is doable, but there are a lot of elements, costs and limitations to take into account,” he adds.
The option to renovate your home
A financial planner finds the home renovation option more attractive because it is less expensive. France is advised, if possible, to withdraw its investments over two years, i.e. 2024 and 2025, to reduce the tax rate. Therefore, she would only need a mortgage of $100,000, which would not require her to apply for an OAS pension now.
“With this route, she would have enough money to support her $40,000 lifestyle, maintain a cash fund, and net $50,000 for her home renovations and pay her mortgage by following a disbursement plan that takes into account her needs and taxes,” says Hadi. “. jab.
In addition, since the OAS pension is increased by 7.2% annually until France reaches the age of 70 and is in good health, he advises it to wait before applying for it. “This far exceeds the expected return on his investment,” the financial planner notes.
Reverse mortgage
We have taken into account here that France has a good credit rating. But if not, or if she had secured a loan for example, or if she leased a car, she would not be able to qualify for a $100,000 or $130,000 mortgage. So he still has one choice.
“This is a reverse mortgage, which has a higher interest rate than a mortgage,” says Hadi Ajab. Since her house is paid off, and she is 66 years old, she can get $84,000 in one lump sum. She will not have to repay this loan until after she sells the house or dies. »
By also withdrawing unregistered investments, it will be able to implement its project. “On the other hand, this is an option that ends up being expensive,” says Hadi Ajab. This is something to consider if she wants to leave a legacy. »
But whatever France decides to do, he insists on one point: “She has to seek help from a financial planner to create a personal spending plan in order to achieve her goal.”
* Although the status described in this section is real, the first name used is fictitious.
Calling everyone
Are you planning a project that requires wise use of your money? Do you have financial problems?
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