Downsizing in Retirement: The Multigenerational Home Option
Retirement typically marks a major life transition, but the path to retirement isn’t always smooth. The challenges of downsizing, both financially and emotionally, can be overwhelming. For example, after decades of relatively stable prices, inflation has returned with a vengeance. While retirees benefit from the cost-of-living adjustments that are applied to the Canada Pension Plan (CPP) and Old Age Security (OAS), few employer-sponsored pensions offer similar protections against inflation. However, there is a potential solution that not only addresses these challenges but may also strengthen family bonds. In this blog post, I explore the unconventional yet increasingly popular approach of retirees moving into a multigenerational housing situation and how it can pave the way for economic security and family harmony.
Reasons for Retirees Needing or Wanting to Downsize
Downsizing is a fairly conventional step that many retirees choose to take. Bedrooms that were once occupied are now left empty. There are only so many offices and craft rooms that a couple needs. Downsizing to a multigenerational setting is less common although certainly not unheard of.
As a strategy for retirement, multigenerational housing has been bouncing around in my head for decades, at least since the 1980s, during my first few years in Japan. I became aware that, by tradition, elderly parents would move in with their oldest son and his family. Sometimes it was effectively a semi-detached or duplex situation; at other times, the two households were more closely merged. This can sometimes be exploited. There have been stories that have emerged where the retired parents have passed away, but the deaths have not been reported, and in the meantime, the pension money kept on being delivered. Inevitably, these sorts of frauds have been discovered. But I digress.
A couple of years ago, I learned that a nurse I visited while on a routine trip to an outpatient clinic mentioned that she and her husband were adding a second floor to their house to accommodate her parents.
My wife and I have four adult children. The thought has crossed my mind that we could sell our house and divide the proceeds four ways so that part of any house our kids would have would include some accommodation for us. I keep on wondering, though, whether our kids could tolerate us for three months at a time.
Reasons for, and approaches to, downsizing vary. The issues that prompt the re-evaluation of current living arrangements are varied.
Retirement typically involves transitioning to a fixed income. It is fixed in the sense that the retirees receive set amounts from CPP and OAS, with periodic adjustments for inflation. It is also fixed in that employer-sponsored pension plans are often set at a fixed amount that does not change with inflation. In retirees’ personal savings in RRSPs, once past the age of 71, the amount that one can contribute has been fixed. That is, no new money may be added. Instead, beginning in the year you turn 72, by law one must now begin to withdraw from the RRIF account or annuity.
If you are employed, however, you still have the opportunity to grow your income, change careers, or grow your savings. While the income in retirement is more stable, it is also more restricted. This can create a financial strain that challenges the retirees’ ability to maintain their lifestyle.
Empty Nest Syndrome
The transition to an empty nest, while natural, can lead to a sense deep sense of loss for many retirees. Speaking from personal experience, my wife and I remember well when all four of our children left our home in the space of 48 hours, three to school, and one to an overseas job. The usual chaos of our formerly bustling home was gone; it was almost like we’d lost our sense of purpose. If you’re not there yet, though, don’t worry. We got over it, perhaps because we are not yet retired. Nevertheless, this and similar emotional impacts can be compelling factors driving retirees to reconsider the size and structure of their living space.
Desire for Increased Family Connection
Retirees often yearn for increased family connection. The dispersed nature of families in today’s world, often separated by geographical distances, can leave retirees feeling isolated. Again, speaking personally, my wife and I have lived in London, Ontario for the last 23+ years, and it was the longest single place our children lived before they moved on to university. Now, two of them live in Toronto, one in San Francisco, and one in Osaka. We are indeed dispersed. It makes sense that a longing for regular interaction, shared experiences, and the joy of witnessing grandchildren’s growth would arise and become a catalyst for contemplating a change in living arrangements.
This interplay of financial and familial considerations creates a variety of motivations that lead retirees to contemplate downsizing. It’s within these circumstances that multigenerational living emerges as a potential solution.
The Multigenerational Housing Solution
Imagine a scenario where a retiring couple moves onto the property of an adult child and their family. This shared living arrangement not only addresses the financial strain on retirees but also fosters emotional support and intergenerational connections.
Addressing Downsizing Challenges
Multigenerational living comes with the potential for several benefits.
Shared living expenses can significantly reduce the financial burden on retirees. If they live in the same building, housing costs and utilities shared with the younger generation can enhance retirees’ economic stability.
Hopefully, this living arrangement strengthens family bonds by creating a mutual support system. Retired parents who downsize into this arrangement are often able to provide financial assistance to their adult children. This cannot only ease the younger generation’s financial strain but also reinforce a sense of unity and cooperation. It’s a mutually beneficial relationship where both generations contribute to each other’s well-being.
The Varieties of Multigenerational Housing Options
There are various approaches to multigenerational housing. The blanket term common across Canada is “secondary suite.” Included within this term are:
In-Law Suite or Granny Flat
I’m not sure if I like either of these terms, frankly, even if the words are clear about including the retiree generation in the same property as the younger generation. In-law suggests an imposition on the spouse who is not the child of the retirees who are joining with them. As for the Granny Flat, where does that leave the Grandpa? My wife often talks about her older years with our kids and inevitably, I am not in the picture, because I’m already dead! The reality, of course, is that women tend to outlive men, but still… These units are typically separate living spaces within a residence.
Not every home has a basement, of course. But for those that do, a secondary suite can be built there. It can certainly be used to accommodate a retired couple. However, I am more familiar with basement suites as an option for younger couples or university students. (One of my daughters lived in such a place while a student – I’m fairly sure it broke all kinds of bylaws.)
Cottage House, Coach House, Garden Suite, or Laneway House
These are names for a separate dwelling in the backyard of the same property. These have been gaining in popularity as a form of infill housing in major cities. A laneway house is typically built where there is access to parking via a back lane and where a garage may be in place. The house is an independent dwelling unit and has separate access via the back lane. Like a basement suite, these can be used to accommodate the downsizing retired parents of the property owner(s) but can also serve as an extra source of rental income.
The other terms, Cottage or Coach House, Garden Suite, etc., are similar but typically do not have separate access to the backyard. As a consequence, the residents of the separate backyard unit will not have their own address.
Tiny homes are compact and mobile dwellings. They are often designed to maximize functionality using a minimum of space. They are typically built on a trailer frame with wheels. Their size generally does not exceed 400 sq. ft. (37 m2). In Ontario, the minimum size is 188 sq. ft. (17.5 m2). Municipal bylaws will vary and the tiny home will need to meet all building codes.
Anticipating the Consequences
A Caution on Familial Harmony
While I have tended to lean toward the idea of multigenerational housing as a positive development, one of the areas where a retiree couple contemplating a move into this situation should consider is how this alters the relationships among the adult children. If there are multiple children, does the household that hosts the retired parents gain an advantage? That could come in the form of readier access to the grandparents as babysitters. It could also come in the form of a financial advantage in terms of adding a unit to the home that will be useful for renting out after the parents are gone. Alternatively, it may be perceived as a disadvantage in that the adult child and family have entered into a position of responsibility for their elderly parents that their other siblings have not. There are financial differences to consider as well. Will they be evened out in terms of gifts during the retirees’ lifetime, or addressed in their estate?
Despite the caveats in the paragraph above, moving into a multigenerational housing arrangement can result in significant positive outcomes. Financial strains can be alleviated, and family bonds can be strengthened. More than a practical solution to an economic problem, living in a multigenerational home can lead to a more meaningful relationship and a sense of security as the retirees age in their new home, aware that they can count on their adult child and family to watch out for them.
Edit as of 2024-02-06
It completely slipped my mind that the federal government has created the Multigenerational Home Renovation Tax Credit. Qualifying expenses of up to $50,000 can be claimed, resulting in a tax credit of up to $7,500 ($50,000 x 15% = $7,500). That means your taxes owing are reduced by up to $7,500. Thanks to Jason Evans of Evans Retirement Planning for the reminder.
This is the 234th blog post for Russ Writes, first published on 2024-02-05
Click here to contact me for an appointment.
Click here for a 2-week free trial of the Money Architect Financial Planning platform.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.