Two of the biggest financial goals in most people’s lives is purchasing a home and saving for retirement. So why not kill two birds with one stone by using your home equity to double as your retirement fund? Saving for a house or a comfortable retirement can be hard enough as it is, let alone having to do both, but if you’re willing to incorporate a little home downsizing in your retirement plan, you can have your cake and then sell it to fund your golden years too. However, just because you could do it, doesn’t necessarily mean you should do it.
Using Home Equity to Fund Retirement
Obviously, there are some factors that you need to consider when deciding whether or not to use your home as your retirement plan. To be clear, this isn’t about flipping homes for a quick profit, but rather tapping into the equity of your primary residence. You could choose to sell your home and rent, or do a reverse mortgage without actually having to move.
Depending on how you wish to spend your retirement, however, some options make more sense than others. For example, if you want to spend your retirement traveling around the world, it doesn’t make too much sense leaving your house behind to collect dust and property taxes unless you have other plans for it.
On the other hand, if your dream retirement entails sitting on the porch reading a book or doing some gardening in the backyard, you may want to leave the house intact. Yet another reason for keeping the house may be to have something to leave for your beneficiaries when you pass on. The memories and sentimental value of your home may be worth more to you than even the best offered price.
Risks of Real Estate
Make no mistake, your home is an investment. It doesn’t matter if you’ve treated it as your primary residence for several decades or just a few years. There are considerable value and risks in it that you need to be aware of.
Like any investment, it’s not wise to rely too heavily on your home because fluctuations of the real estate market could make even the best laid plans go awry. Don’t go squandering potential 401(k) contributions just because you own a home, but at the same time, having some equity in your residence to fall back on lets you diversify your retirement fund a little more.
To Sell or Not to Sell
Here are a few issues to consider when deciding on whether you want to keep or sell your home as you enter retirement:
- Real Estate Market: As stated above, and as evidenced by the current housing debacle, property values are vulnerable to fluctuations and bubbles like any investment. The decision to sell your home for retirement should be one that is planned years in advance so that you have as much flexibility and preparation as possible.
- Housing Prices: If home prices in your neighborhood have bottomed, it makes little sense to sell unless it’s unavoidable. You’re selling your home. Don’t settle for low ball offers if you don’t have to.
- Interest Rates: If prices are low but interest rates are favorable, you could be better off obtaining a reverse mortgage or a HELOC instead. Reverse mortgages are becoming popular with retirees age 62 years and older. Do your research to see if it’s right for you though, because the terms can get quite complicated.
- Costs of Downsizing Home: Whether you’re looking to rent your next home or to purchase a smaller residence, it’s prudent to calculate the costs closely. If rent prices are high, it could defeat the purpose of downsizing. On the other hand, if you can move a few blocks down for a comparably sized house at a much lower price, your transition may not be too bad at all.
- Your Estate: Cashing in on your home also means having less to leave behind. Consider how that will affect your beneficiaries and if your decision means extra responsibilities for them when you’re gone.
Selling your home involves a lot of emotions. As with all financial matters that involve significant personal meaning, it’s best to discuss it as far ahead of time so that you can approach it with a clear and rational mind. You may want to use tools like a retirement calculator to see if additional income is even needed.
The last thing you want is to have your emotions get the better of you or find yourself in a position with limited options. You spent a considerable portion of your life building your home. Do yourself the courtesy of getting the most reward out of your life’s work.