home equity in retirement planning: Home equity often ignored in retirement planning, but it could boost income and savings
For people aged 60-69, home value has increased from around 40% of their wealth in 1989 to just over 50% in 2022. For those aged 70-79, the share increased from 38% to 50% over the same period. According to Kiplinger analysis, the average home equity among 15 million middle-wealth Boomer households is about $750,000, out of a total net worth of $1.75 million.
Why is housing wealth often overlooked?
Most retirement plans do not include home equity as a source of income or savings. Although reverse mortgages are heavily promoted, planning tools treat them solely as loans and not as useful assets. Planning systems often view a reverse mortgage loan as equal to the sale of the home, not as flexible cash. Some experts are concerned about reverse mortgages because of high fees and closing costs.
Others fear that the loan could eat into the home value over time. Many retirees follow the “no mortgage in retirement” belief. Planning focuses mostly on income, not liquidity or leaving money to the family. Experts say retirement goals should include the “Three Ls” (income, liquidity and legacy), as Kiplinger puts it. Some advisors are not licensed to offer all financial products, including reverse mortgages. This makes it difficult to include housing wealth in full retirement plans. Many advisors are trained to view homes as illiquid assets unless sold.
Why should housing wealth be included?
Using home equity along with annuities can increase retirement income. It can also provide tax benefits and extra savings on medical expenses. Unexpected expenses like long-term care or helping with children require extra money. Selling a house to make money is expensive and stressful. Selling costs can be 10-15% of the home price. Taxes on earnings can add another 10%-20% to the cost.
The total cost of selling a $2 million home can be $250,000 or more. Reverse mortgages, called HECMs, have government protection. If the loan balance exceeds the home value, families no longer owe extra money, thanks to support from the U.S. Department of Housing and Urban Development. HUD insurance covers the difference for lenders.
Historical research shows that home values and rates often perform better than expected. Training programs are being developed to teach advisors about housing wealth. One such effort is led by the National Association of Insurance and Financial Advisors.
How can home wealth be used in retirement planning?
Experts recommend combining all assets (savings, IRA money, and home value). Plans should compare two options, one with housing wealth and the other without. As Kiplinger notes, nearly 80% of retirees choose to age in place rather than sell a home. One strategy combines a reverse mortgage with an annuity for income and liquidity. Another scenario assumes the house will be sold later, around age 85.
The example shows a 67-year-old retiree who owns $1 million in three asset types. Using housing wealth, the plan provided higher starting income. The housing wealth plan also showed a larger inheritance at age 95. Between the ages of 67 and 84, there were advantages to using home equity. Avoiding sales costs and taxes also improved results. Both plans benefited from lifetime annuities.
Overall investment returns were similar with both methods. Experts say incorporating housing equity gives retirees more flexibility. Since homes account for about half of retirement savings, ignoring them could reduce benefits. Tax efficiency and risk management will be addressed in future discussions.
FAQ
Q1. Why is home equity important in retirement planning?
Kiplinger says home equity can provide extra income and savings in retirement, but many planners ignore it.
Q2. What is a reverse mortgage and why is it being discussed?
Reverse mortgages allow retirees to cash out the home value without selling the home.
