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By Carin Thomas Like many, you probably feel that owning a home is still the “American Dream.” Purchasing your home is likely also one of the largest investments you’ve made. Unfortunately, with a still uncertain housing market, many of us may be relying too heavily on our home as a source of future income. As with any important investment, equity in real estate should be approached strategically. In order to put it in proper perspective, ask yourself how your home fits with your other financial goals, especially your plans for retirement. The other day, my neighbor and I got into a conversation about what we envision for our retirement lifestyle. When she mentioned her plans to put more money into renovating her house because she expects her home to fund her retirement, I was concerned. Far too many people, especially seniors and retirees, agree with my neighbor and are under the impression that this is a good idea. Relying on your home to fund retirement is dangerous and risky, especially given the current housing market. As a financial advisor, I help my clients develop a properly diversified portfolio. Just like the old adage, putting all your eggs in one basket is risky. Putting them all in one basket that you can’t control is even riskier. And that’s exactly what people are doing when they rely on their home to fund their retirement. No one can accurately predict or control the housing market, and regardless of how much money they “invest” in their home, they can’t guarantee any rate of return on the investment. We’ve certainly seen evidence of that in recent times. During the last year, we’ve seen housing values drop dramatically. This is the opposite of what we saw in the previous five years, when housing prices nearly doubled. Unfortunately, that created a false sense of security among homeowners who thought that their homes would continue to increase in value at that pace and could eventually help fund their retirement. This false sense of security is causing many boomers and seniors to enter retirement unprepared. If you’re currently planning to use your home to fund your retirement lifestyle, you are typically banking on one of these options: taking out a reverse mortgage, downsizing to a smaller home, or relocating to a more affordable area. Consider the following options for unlocking your home equity during these turbulent times: Reverse Mortgage A reverse mortgage is a unique type of mortgage which allows you to convert the equity in your home into a ready source of funds for a variety of needs1. It is a wealth distribution tool for those who want additional cash flow but do not want to liquidate or disrupt their investment portfolio or other assets. In order to qualify for a reverse mortgage, you must own and live in the home and you must be at least 62 years of age. This can be a solution for seniors with significant home equity looking to remain in their existing home. Reverse mortgages can be subject to substantial fees, so this idea is best if you plan to stay in your home for a long while. Downsizing or Relocating Few empty nesters truly need the same amount of space they used while raising a family. Thus, it is often logical to downsize to a smaller home, freeing up capital for retirement, education savings, or other expenditures, such as long-term care. However, weigh the realistic advantages and consequences of this option before selling your home. It is unlikely that you will be able to purchase a house equivalent to your current home once you retire. Also, consider what the downsize will do to your lifestyle. If you enjoy hosting large family gatherings or inviting the grandchildren for the weekend, this should factor into your decision. The same advice applies to relocating. Be realistic with yourself and your family. Calculate how much you’ll actually save by moving to a more affordable area. If the savings are minimal, the move may not be worth the hassle. While these options can be effective, they are not the “end-all, be-all” for funding your retirement savings. The main problem with using your home to fund retirement is two-fold: One, you can never know the exact value of your home at any given time, nor can you control it; and two, your home is not an income-producing asset, meaning you can not use your home to grow your money. When you retire at the average age of 65, you may still have decades to live, thus you need to make sure your money lasts. That means that you have to manage your portfolio with diversification and with a longer-term outlook. You may not want to invest too heavily in risky stocks, but it may not be wise to invest 100 percent in bonds, either. You still need that money to grow. If all of your equity is locked in your home, that’s not possible. When I sit down with my clients to start their retirement planning, there are a few questions I ask to get a clear picture of their anticipated retirement:
Once my clients and I discuss these important topics, we can begin to calculate how to best plan for their ideal retirement. As a Merrill Lynch financial advisor, I have access to several tools that can help forecast the probability of my clients achieving their ideal retirement based on their current portfolio. From there, we map out a plan that will get them where they want to go, when they want to go there. Your retirement can be the best time of your life, if you prepare for it. Don’t lose sight of how your home equity can contribute to your successful senior years, but also don’t neglect other strategic investments because of your home. Carin Thomas, Vice President and Wealth Management Advisor with Merrill Lynch in Bloomington, Minnesota, specializes in retirement planning strategies. She can be reached at 952-820-1983 or carin_thomas@ml.com.
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