For many people, a house is their most important asset – but it can also be an important part of their retirement plan.
Baby Boomers and older Americans are sitting on $13.8 trillion in real estate wealth, according to Realtor.com. That means some may be planning to sell their homes to free up cash and transition to a smoother retirement. Others may need to turn home equity into a source of retirement income. Here’s how to navigate making your home a central part of your retirement plan.
Why a house becomes a retirement plan
Homes have become more appreciative over the past few decades, and some people have more savings in their homes than in their retirement accounts. Retirees can tap into home equity to pay various expenses, but it’s different from withdrawing funds from a 401(k).
Using home equity reduces your stake in your home and comes with interest. You have to mortgage your home, which requires a loan. That whole process can take several weeks. Some retirees may live longer than expected and end up running out of home equity. Without a plan B, retirees can be forced to make very difficult decisions when they have limited options.
This is why many retirees choose to downsize. You can move from an expensive market to a small home in a low-cost area. Some empty nesters may accept having a small space or living in a one-story house so they don’t have to worry about stairs. That way, you free up money without borrowing money from your home.
What can go wrong if you need to sell
While retired homeowners can have a reasonable amount of wealth stored in their properties, they need to find a buyer who can pay the current price – and get a new home at the price they deserve. A poor housing market, high selling costs and the challenges of finding and buying a new home may put a damper on their plans.
Even with this economic reality, some people may not want to sell their homes. They may feel attached to property, society or other aspects of their neighborhood. While it may make sense to stay put if you can afford it, some people may need to downsize to preserve their finances – even if they don’t feel ready to move.
How to make a home equity retirement plan safe
Selling your home can result in a financial windfall, but you still need a place to live. Check how your expenses will change if you downsize, live in a rental property or choose a senior living facility.
It is a good idea to plan this type of move in advance so that you are not caught off guard. A financial planner can help you navigate the transition and predict how it may affect your finances.
Some people find other options, such as renting a share of the home or multi-generational housing. A retiree’s older children may struggle with current housing prices, and living with them can make the cost more manageable for everyone if the whole family is on board. It’s also important to save for retirement outside of your home, including retirement savings accounts like 401(k)s and individual retirement accounts (IRAs). That way you are not completely dependent on your home to allow you to enjoy a comfortable retirement.
