Retirement - Cashing Out

A friend of mine is 62 and fast approaching retirement. We sat down recently and talked about his investments and plans for retirement. One question came up immediately – what is the best way to cash out?

The challenge with him is most of his portfolio is in his house. While he does have a fairly decent retirement fund, it would only be enough to have a minimal monthly income – that is, it wouldn’t leave much for travel and anything else. We looked at selling the house and using the proceeds to buy an annuity, but the problem is, the rental market is getting fairly tight here in Vancouver and to rent something decent, it would be fairly expensive. We also looked at downsizing to a smaller condo, but prices are so high, getting anything reasonable in a good location would use up a large portion of the proceeds and leave very little for monthly income.

So, an obvious solution was to somehow take some of the value out of the house since it was fully paid. We first looked at a reverse mortgage - in this case, the mortgage company will lend you a lump some based on the value of your house – usually up to 40% - and will not require any monthly payment as long as you live in the house. This is a handy feature for seniors on a fixed income AND they can stay in the house that they’ve lived in for most of their life.

Another option is a home equity loan (HEL). The bank will lend you usually up to 75 or 80 percent of the value of the house but in this case, monthly payments are required.

At the time, his house was worth $700,000 so under Option A ‘Reverse Mortgage’, he’d get around $280,000 and under Option B ‘HEL’ he’d get around $560,000. With this he is planning on buying an annuity (there are a few different kinds, but that’s a different post!) – he would obviously get more monthly income with Option B, but then you have the monthly interest payments.

So, what did my friend chose? He decided to go with a home equity line of credit. This is similar to an HEL but instead of getting a lump sum, you have the option of taking out the money when you need it. With the other options, you take the full amount upfront … he decided that he didn’t want that. With the line of credit, he can budget his money more effectively and only take the money should he require it in a given month.

Clearly many people are going to face the issue of converting their RRSP’s and real estate into some kind of monthly income. There are, of course, many options, but clearly one of the biggest issues will be what to do with your house if you have one.

It also begs the question, with many seniors retiring in the coming years and looking for ways to cash out their RRSP’s, what implication will this have for the stock market?