About 70% of older Americans say their home is their most valuable asset. However, there are mixed opinions on whether or not you should include your home equity in your retirement savings.
Some financial experts believe you shouldn’t factor your home equity into your retirement savings because you’ll need a place to live in your golden years. But others say you can leverage the value of your property to provide income during retirement using reverse mortgages and home equity loans, even while you’re living in your home.
Here’s everything you need to know about retirement saving and home equity to help you formulate your retirement plan.
Retirement Saving and Home Equity 101
When it comes to retirement saving and home equity, the first question to ask yourself is how much equity you’ll have when you retire. Is your house going to be paid off, or will you still have some mortgage debt left? The less mortgage debt you have, the better positioned you are to use your home equity to supplement your retirement savings.
Sell Your Home and Leverage the Proceeds
Next, consider what you might want to do with your home in retirement. If you’re an empty nester living in a large house, you may want to downsize to a smaller property that requires less upkeep. If you have enough equity in your current home, you could use the proceeds from the sale to buy your new house in cash (and invest any money that’s left over). Not having a mortgage will lower your expenses, reducing the amount of invested assets you need to fund your golden years.
If you don’t have enough equity to purchase another home outright, selling your home and leveraging the proceeds is still an option. You could invest the money you make from selling your home in the stock market or buy an annuity to generate extra income. Then you could rent an apartment or condo in a low cost of living state, move in with your kids, or explore alternative housing options. Some retirees choose to buy a used RV and travel the United States, or even relocate to an affordable tropical locale like Mexico or Costa Rica. The world is your oyster!
Stay in Your Home and Tap the Equity
Maybe you don’t want to become a globetrotter in retirement and want to stay put right where you are. The good news is, you can still tap the equity in your home while living in it. Taking out a reverse mortgage allows you to borrow against your home equity (as a line of credit or lump sum payment) without having to sell and move out.
You’ll still be able to enjoy your home during your golden years while getting the influx of cash you need to supplement your retirement savings. When you or your heirs sell your home, the proceeds will be used to pay off the reverse mortgage.
Turn Your Home Into an Income-Generating Asset
If you love your home and want to stay, another option is to rent out a portion of your home to generate extra income. If you have a spare bedroom or basement, you could rent it on Airbnb or find a long-term housemate.
Don’t have any extra space? You could take out a home equity loan or line of credit and use it to make improvements to your home. Converting your garage or building a guesthouse in the backyard could provide the extra income you need.
Wrapping Up
Should you include your home equity in your retirement savings? It depends on what you’re planning to do with your house in your retirement. If you’re planning to stay in your home and aren’t comfortable borrowing against it or renting it out, it may not make sense to factor home equity into your retirement plan. However, if you’re willing to sell your home and downsize or take out a reverse mortgage, your home equity can be a great income-generating resource in retirement.
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
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