Understanding the role of your home in retirement
According to the 2013 Investment Company Fact Book, American retirement relies upon a five-layer pyramid comprised of Social Security, homeownership, employer-sponsored retirement plans, individual retirement accounts and other assets. Social Security represents the base of that pyramid, as it is the largest component of retiree income for most Americans and the predominant income source for lower-income retirees. Nearly as importantly, homeownership plays a role as a significant resource after Social Security. That’s because older Americans are likely to either own their homes outright or have smaller mortgages relative to the value of their homes. Unlike typical resources though, a home’s value lies in simply being used (as opposed to used up). Retirees receive the value of the home by not needing to pay rent.
Because their home tends to be most Americans biggest asset, tapping into that asset as a retirement resource may seem to be a good idea. This article from Forbes, suggests that people may need to look at some options before they make a call to the real estate agent.
The first thing people should be cognizant of is that they’ll still need a roof over their head. Some people take advantage of the value of their current home over a smaller home or a less expensive neighborhood. By choosing to downsize, you can continue to live rent-free but take advantage of having a chunk of the difference to use for retirement needs.
The problem with that approach is that most people’s homes are not merely investments. They often embody a family’s history and provide a connection to people and a place. That connection can make it difficult for family members, even those that no longer reside within the home, to give up the home. In addition, most people over estimate the value of their home and the amount of time it may take to sell it. This can result in receiving less money than expected for the home you valued and paying more money than expected for a home you have no connection to.
Those individuals not interested in selling their home might consider leveraging it with either a home equity loan or a reverse mortgage. The risks of these strategies is the potential for losing an important asset should you be unable to afford to either repay the loan in the case of a home equity loan or pay the costs to insure and maintain your property in the case of the reverse mortgage.
So what’s the solution? Hire a qualified financial advisor to help you weigh the pros and cons of any retirement strategy and help you to create a plan that allows your home to continue to act as a safety net without jeopardizing it’s most important value—allowing you to age in place.