4 Reasons Planning Retirement Around Home Equity Is a Bad Idea
Written by
John Csiszar
Edited by
Rebekah Evans
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For most Americans, especially those in or near retirement, their homes represent their single largest asset, per Federal Reserve data.
Thanks to the low interest rates during the pandemic and the explosion in home prices shortly thereafter, even those who have bought homes relatively recently are likely sitting on a decent amount of home equity.
But planning retirement around home equity can backfire due to liquidity constraints, market timing risk and rising ownership costs, factors that retirees often underestimate — here’s why.
Home Equity Isn’t Liquid Wealth
There’s a huge difference between a retiree who has $1 million cash upon retirement and one who has $100,000 in cash and $900,000 in home equity. With an all-cash portfolio, you are completely liquid, flexible and able to make timely decisions. Home equity, on the other hand, represents value on paper but not money in hand. To access it, you’ll have to either sell your home or borrow against it. Each of these options comes with its own consequences, in terms of delays, costs and conditions.
Selling May Require You To Time the Market
If you plan to sell your home to generate retirement income, then housing market performance becomes your key risk factor. Housing markets are cyclical and vary regionally, so selling in a downturn could leave you with significantly less than expected. While you can wait to sell until the market recovers, if you need to access your home equity to fund your retirement, this isn’t really a viable option, as housing recoveries can take years.
Unlike a broad investment portfolio — where partial liquidations are possible — a home is a single, indivisible asset. If conditions are poor when you need income, you may be forced into a sale at a disadvantageous time.
Ownership Costs Rise in Retirement
Even if you use your home to generate rental income, it might not provide the retirement security you seek. This is because property taxes, insurance premiums and maintenance expenses rise over time, especially as houses age. According to Landsberg Bennett, even if you raise your rent every year — which landlords typically do to cover inflation and rising maintenance costs — those increases may still lag overall expenses and squeeze net income over time, making rental returns less reliable than retirees expect. Without a net income stream that increases by at least as much as inflation does every year, you’ll find that your purchasing power decreases.
Concentration in a Single Asset Increases Risk
Regardless of the asset, from an investment standpoint, having all your eggs in one basket can be a risky strategy. This is particularly true in the case of home equity, which is often extremely concentrated and always tied to one location and market. Financial planners recommend including home equity as a non-correlated asset in a portfolio, according to the Financial Planning Association, but recommend diversification to hedge against downturns across different asset classes. Leaning heavily on home equity undermines that principle and increases vulnerability to local or broad market shifts, per the Urban Institute.
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