Downsizing in retirement

Planning where you will live in your later years

People often talk about eventually downsizing their home when they get to retirement. Practically, it doesn’t make sense to clean and maintain unused space once the kids have flown the coop.

Financially, this may be intended as a way to release tied-up capital to help supplement retirement income, but just how much becomes available – if any – depends on where and what kind of destination you have in mind.

Whether you are driven by the finances, or just see it as a byproduct of a lifestyle choice, you need to carefully think through and plan how to proceed. A misstep could be costly in either respect, so here are some things to mull over.

Are you assuming downsizing will be a financial windfall?

All else being equal, it costs less to maintain a smaller property. But between here and there is the matter of moving. Maybe you’re leaving a house in the big city for a humbler abode further away. However, if you’re moving within the same geographic market, the financial effect may be neutral at best, despite reducing the physical footprint.

Between the real estate commission on selling the old place and the land transfer tax on buying the new one, you’re likely well past 5% of your sale price before you even hire the movers.

Add to that some updated appliances, new/smaller furniture, window coverings and other settling-in costs, and your physical downsize could be more of a lateral move financially. That’s not necessarily a bad thing, but thinking through the finer details can give you a clearer view of the full picture.

How will the new digs fit your relationships and lifestyle?

Having reviewed your finances, you may consider looking beyond the local area or at a different kind of housing.

How far are you going?

A more distant move could affect the frequency and amount of time you are able to spend with family and friends. Maybe you’re moving closer, but if not then you could face challenges logistically, emotionally and financially. Consider too the impact on church/community connections, and professional/personal relationships like your doctor, dentist, hairdresser/barber, and massage therapist.

Cozying up to neighbours, or too close for comfort?

If you are moving to a different kind of accommodation, say from a detached home to a townhouse or condo, have you thought about how that will feel? Some people are comforted being in closer proximity to others, whereas some may feel crowded. Elevators and underground parking are great conveniences, but to some they are a personal security concern. Being in the city with a balcony view can be invigorating or intimidating.

Decisions on a lifetime of stuff?

In terms of your physical surroundings, how much do you want to hold onto and how much do you want to leave behind? It’s safer and less physically demanding not having to navigate stairs and maintain an outdoor space. But what if gardening is your thing? And with less space to maintain, you also have less room to host holiday family gatherings, or even just have the grandkids for a sleepover. What matters to you?

How about taking a test-run?

If things don’t work out with the new place then you may want or need to move again. Clearly that can be disruptive and inconvenient, and if you become a serial mover then financial strain could mount.

One way to test it out, whether before or after you sell, is to use a service like airbnb to live for a couple of weeks or a month (or a year, like a friend I know) in a place near and similar to what you’re considering. Discuss it with your real estate professional and your financial advisor to make sure you have the right information about both the market and yourself before making a more permanent commitment.

CPP – Canada Pension Plan

Public pensions for retired & disabled workers

CPP is a social insurance plan providing income replacement to contributors and their families in the event of retirement, disability or death. It is government-run, but funded by mandatory employee and employer premiums.

Premiums are invested by CPP Investments, a body independent of government politics or CPP administration. While CPP is the largest long-term disability plan in Canada, serving both contributors and dependents, the largest component of CPP payments is the retirement pension.

Guiding principles

Historically, CPP was designed to replace 1/4 of a worker’s average earnings, up to the year’s maximum pensionable earnings (YMPE), an annually-indexed dollar ceiling approximating the average national wage. In 2016, enhancements were introduced to eventually move the replacement target to 1/3 of qualifying earnings.

- Phase one of the enhancements began in 2019 with the premium rate moving from 4.95% in roughly equal annual increments through to its target 5.95% level in 2023.
- Phase two began in 2024, with a 4% premium being levied on income above the YMPE up to the year’s additional maximum pensionable earnings (YAMPE). The YAMPE is set at 7% above the YMPE in 2024, then rises to 14% above YMPE for 2025 and thereafter.

Premium payments

Employers withhold employee premiums in their payroll process, adding an equal amount as its own premium, and remit the total to the Canada Revenue Agency. Employers claim a deduction for their premiums. Comparatively, employees claim a tax credit for premiums on income up to the YMPE, and a deduction for the additional premium up the YAMPE. Self-employed individuals pay both the employee and employer portions.

For 2026 the employee premium rate of 5.95% applies above the $3,500 exempt income level up to the YMPE of $74,600, for a maximum premium cost of $4,230. The 4% for the addition applies from the YMPE up to the YAMPE for 2024 of $85,000 (a range of $4,700), for a potential maximum additional premium of $416.

The connection between premiums paid and your potential retirement pension

Contributors earn credits for premiums paid during working years, from age 18 until the age when the pension begins. In concept, credits are spread across the number of working years to arrive at an average.
In practice, there are adjustments for presumed and actual absences from work, mainly:

General dropout

Takes out the equivalent of up to eight years, to acknowledge schooling, unemployment or other reasons

Child rearing provision

For actual time away from the workforce spent caring for children up to age seven

Disability exclusion

Periods during which a person is disabled, per CPP definitions

Over-65 dropout

May replace relatively low earnings before age 65 with higher earnings after age 65

Your actual retirement pension depends on the age when you begin

For 2026, the maximum annual pension is $18,092 at age 65. Age 65 is what CPP considers to be the standard age, but it’s not a legal requirement. A retirement pension may begin as early as age 60 or as late as age 70:

- The pension is reduced 0.6% for every month taken before age 65, which is a 36% reduction at age 60. For 2024, this works out to a maximum of $11,579.
- The pension is increased 0.7% for every month taken after age 65, which is a 42% increase at age 70. For 2024, this works out to a maximum of $25,690.

Complementary components of the CPP, outside of the core retirement pension

Disability pension

Unable to work at any job on a regular basis due to severe & prolonged disability

Survivor’s pension

Spouse or common-law partner of a deceased CPP contributor

Children’s benefit

Dependent of a disabled/deceased contributor, to age 18, or age 25 if full-time student

Post-retirement benefit

Augments pension of CPP retiree who continues to work and pay premiums

Post-retirement disability benefit

When a disability arises after starting retirement pension

Death benefit

A one-time $2,500 payment to the estate or dependent of a deceased CPP contributor

Chess and retirement decumulation

The end game requires a dynamic strategy

Did you catch The Queen’s Gambit series on Netflix? It came out a few years ago, and is still playing if you want to take a look. It’s a fictional account of a 1960s prodigy who disrupts the world of chess. Apart from drawing millions of viewers, it’s led to a bonanza in chessboard sales.

There are some interesting parallels between chess and our income choices in retirement. As in chess, a lot of moving parts affect retirement, some we can control and some we must contend with. Both domains require strategy, forethought and flexibility.

Decumulation with tax in mind

Some retirement decisions are one-time, like starting Old Age Security and Canada Pension Plan. Others may be infrequent, like winding-up a business, downsizing a home, whether to engage assisted living support or when to consider a move into long-term care.

In terms of private savings, a critical juncture is when to switch modes from building retirement savings to drawing from them. This is the move from accumulation to decumulation, with three common savings sources to draw from: an RRSP/RRIF (including locked-in versions), a TFSA and non-registered investments. Respectively, the draw from each of these sources is taxable, non-taxable and partially taxable.

Usually, the desire is to maintain a certain lifestyle while minimizing income tax. That’s not as simple a task as it may seem, given our progressive income tax system that charges higher tax rates on higher income levels. Paying tax may not be pleasant, but too much focus on reducing a current year’s tax bill could lead to a disproportionately heftier tax bill in future years, especially if brought into income at death. It depends on personal values how much of tax planning is about the here, the here together (as a couple), and the hereafter.

The key is to determine how best to draw on these savings sources to achieve the desired result.

Planning through the permutations

Effective decumulation is often framed as a search for the optimal order for depleting each savings source before moving on to the next. That’s the way financial planning software algorithms may solve for targets such as maximizing net wealth at life expectancy. In this case, the software might provide a rank order of the six possible permutations among the three savings sources.

But we shouldn’t expect the output to be a set-it-and-forget-it prescription. That would require knowing not only our present circumstances and intentions, but also all future developments.

Consider again the game of chess. The board is an 8 by 8 grid, with each of the two players having 16 playing pieces. So, before the game starts, half of the 64 squares are occupied. White chooses among 20 opening moves, as does Black to follow, leading to 400 possible board layouts when White considers move number two. By round three, there are 197,281 layout possibilities, and over 119 million two moves later.

Amazing as that is as an example of exponential expansion, it pales in comparison to our years in retirement. Life has far more variables, and more actions that may be taken with each. These include the option to draw from multiple sources from time to time to tactically exploit tax opportunities, rather than fully liquidating each source in succession.

Vision, revision and annual reviews

Chess and financial planning share the need to anticipate, act, observe and adapt. That’s what chess masters do, always looking a few moves ahead and then continually adapting as each turn comes around.

Similarly, as life unfolds in retirement, we are not necessarily bound to continue on a path that was suitable when set some years ago, but that may no longer fit current needs. Changes happen to us, and to the world around us:

- Personal circumstances
- Available wealth, in each savings source and as a whole
- The world we live in, with particular attention on any new or modified tax rules

Often, things are fairly fixed over the short term, but become more flexible looking further out in time. With some foresight and forethought, adjustments can be made according to changing conditions – both as required and as desired – in the way we spend our time and how we spend our money.

The important point to emphasize here is that the process is dynamic, ideally anchored by annual reviews with a capable financial advisor. At each turn, advisor and client can plot the best course using the information presently at hand, with full understanding and intention that the plan will revisited as each year unfolds, and revised as necessary according to developments.