Your Biggest Retirement Asset: Your House

If you are like many homeowners, you’ve sunk a lot into your residence and it is one of your biggest assets.
And that may be one of the few things you have in common with other homeowners. One of the difficulties in offering advice to homeowners is that there are so many different situations. We’ve heard a lot in recent years about homes that are underwater and their owners who have no choice to stay put. But there are other people who have a good amount of equity in their homes because they bought before the bubble, were able to put down a large down payment, or live in one of the markets that never crashed or has already rebounded. Some will own their homes outright in retirement and others will carry a mortgage.
The common thread among all these homeowners is that all are moving closer to retirement, at which time they will need both a home to live in, and income on which to live. The tricky part about housing as an asset is that it’s an especially difficult one to liquidate. In some cases, investing in our homes is the wisest thing we can be doing with our money. But some houses truly can be money pits taking resources that would earn better returns elsewhere.

Time to Evaluate

If you’re a homeowner approaching your retirement years, it may be a good time to consider your home relative to your overall net worth and the income you’ll need to live on. It may also be a good time to make a change. Mortgage rates remain low but seem finally set to rise. Likewise, while the housing rebound has come in fits and starts, prices are rising in more and more markets. While everybody’s situation is different, here are some common scenarios.
You own your house outright. Congratulations. Your primary residence is likely worth more than many people’s 401Ks. And with that comes options. If you own more house than you are likely to need in retirement, downsizing while rates are still low could give you time to settle into a more size-appropriate home and free up assets for investing in stocks, mutual funds or annuities. Since selling a house carries several costs from closing fees to moving expenses, downsizing is a not always a smart move and certainly not something to be done lightly. But if you have incentive to free up some of your assets and separate yourself from some of your space, you could put yourself in a more comfortable position for retirement with both a home and additional assets to invest.
You carry a small mortgage. Small, of course, is a relative term when it comes to mortgages, but for the purposes of this discussion it means a manageable mortgage that isn’t breaking the bank. And outside of owning a home outright, it’s the best position you could be in. The question to ask yourself in this situation is this: Would you be better off with no mortgage, and does it make sense to downsize to get there? Calculate how your income in retirement will change and consider whether you can make up the shortage with a less expensive home and a smaller mortgage.
You’re underwater or carrying a large mortgage. As years of turmoil, and often failed policies in the housing market underscore, there’s often not an easy solution for homeowners who feel stuck under too much house. Short selling could hurt your credit rating and make it more difficult to buy a more affordable home at a good interest rate. If the house is enough of a weight that you feel you must dispose of it, you could sell it at below cost and contemplate a rental, but beware. Renting is not a good way to accumulate wealth unless you have a bucket of savings that can be invested. It’s not ideal but, if you can afford to do so, the best option for underwater homeowners is often to stay put.
You don’t own a home. Unless you have the cash to purchase a home outright, buying a home as you’re approaching retirement could leave you more debt-heavy than asset-rich. And while it’s appealing to have a place of your own in which to grow old, the important thing to consider is the opportunity cost, or the value of the option you’ve foregone. Will you use money that might otherwise have been invested elsewhere? And is the tradeoff worth it? The answer depends very much on your individual balance sheet. The important thing is to run the numbers.
There are a lot of good reasons why home ownership has long been an American dream. Homes can be our identity, our security, and, as noted, one of our major assets. But as assets, homes need to be considered without some of the emotion that typically accompanies buying and owning a home.
Love your home, then run the numbers to find the right place to call home in retirement.