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January 17, 2024
If you own a home, it was likely one of the smartest lifelong financial moves you have ever made. In addition to providing a safe haven for living your life, it is also a forced savings account and a hard asset that appreciates over time.
Your home has given you tax advantages, access to services in your community (particularly important if you had kids and sent them to public school), and perhaps it has been a place to work during the pandemic. And, your mortgage was a strategic financial decision that gave you leverage and flexibility.
Homeowners 62 and older have experienced blockbuster growth in home equity – now estimated at $12.39 trillion.
The housing market saw unprecedented growth over the last decade. However, it is important to note that values have seen modest drops (compared to long term growth) in some markets.
The huge financial advantages your home can give continue into retirement – particularly if you have built up significant equity.
That money can now be converted into retirement income, cash for retirement expenses, financial leverage to improve your financial options, or funding for longevity, a long-term care need or other hard to predict event.
Explore the 5 ways you might want to use your home equity for retirement. And, try them out on your own financial plan by running different scenarios using the NewRetirement Planner.
There are a wide variety of ways to use your home equity for regular retirement income.
Downsizing is usually the most efficient way to cash out your equity. If you want to turn that money into retirement income, you might consider converting that money into income producing assets such as rental property, bond ladders, dividend producing investments, or a lifetime annuity.
It has become somewhat common for people to rent out all or part of their home as a source of income.
Somewhat controversial, a reverse mortgage is a specific type of home equity loan that is not paid back until you permanently leave your home. One of the options on a reverse mortgage is receiving your loan amount as lifetime payments. A portion of your home equity is turned into lifetime income.
Not everyone has saved quite enough for a secure retirement. However, your home equity is a real asset. You can convert the equity into money for retirement expenses.
When you downsize and release your home equity you gain a liquid asset that you can invest or spend as desired and appropriate. You have many options for downsizing.
A home equity loan is a common way to access the money you have built up in your home. However, it can sometimes be difficult to qualify for this loan in retirement due to income requirements and your need to make monthly payments against the loan.
This was a great option when interest rates were at rock bottom.
Perhaps one of the best ways to use your home equity is to hold on to it and only use it if you need to. For example, maybe you:
The only problem with waiting to tap the equity when you really need it, is that it simply gets harder as you get older. Relocating is more difficult as you age. And, financial transactions are more problematic for older people with physical and cognitive decline.
One of the most challenging aspects of retirement planning is predicting how long you will live. And, it can be stressful to think about outliving your assets. Your home equity could be a backup plan for funding retirement if you (luckily) live longer than your assets.
Long-term care is tremendously expensive. And, you have no way of knowing if you will need it or not. So, reserving your home equity to fund this expense can be a smart strategy.
If you can’t qualify for a home equity loan, but want to stay in your house and need access to cash, a reverse mortgage home equity line of credit might be a viable option.
Maybe you don’t exactly need cash now. However, releasing home equity could increase your financial options.
Having access to a home equity line of credit, cash proceeds from the sale of your home or a reverse mortgage line of credit gives you flexibility. Think of your home equity as another source of money to use strategically.
Here are a few ways to gain leverage and flexibility with your home equity:
A home equity line of credit can be an efficient way to have access to your equity. You only pay interest on the money you use, not all of the funds that are available to you.
A line of credit just gives you financial options. It is a pool of money you can access if needed.
Of course, if you are ready to leave your home, downsizing and releasing the equity to cash is the most flexible option of all.
For better or worse, many people want to retain their home equity to leave to their heirs. Every year billions of dollars are passed onto adult children via real estate. And, recent research has found that people who expressed a stronger desire to leave an inheritance of at least $10,000 were much less likely to sell their homes before they died – with the intention that the house would be part, if not all, of that inheritance.
This held true even if the value of the home was in excess of the desired inheritance.
The NewRetirement Retirement Planner makes it easy to try out any of these options for using home equity as part of your retirement plan.
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