Homes As Retirement Plans: Make Sure You Know The Risks

For many people, their home is the biggest purchase they’ve ever made, and it’s also a large part of their net worth. You might be in a similar situation. You spend decades paying interest, making mortgage payments, and spending money on maintenance and renovations, all with the hopes of driving up equity. But should you rely on your home as a retirement strategy?

Your home’s equity isn’t a liquid asset. You can’t access the funds easily. If you have a large net worth, but most of it is tied up in your home, you could overestimate retirement readiness. Consider liquid assets before deciding if you have what you need to safely and comfortably retire.

If most of your net worth is tied up in home equity, it’s important to understand the benefits and the blind spots. Then, you can determine the best ways to factor your home into your retirement plan.

Why Do So Many People Count On Their Homes For Retirement?

Throughout history, real estate has been a significant wealth builder and often a key indicator of financial success. Typically, home values tend to rise over time, and owning a house can provide substantial increases to your net worth.

Depending on when you purchase your home, by the time you retire, you could have hundreds of thousands of dollars in equity. Therefore, it’s only natural to see your home as a potential financial cushion.

As equity increases, it’s easy to look at your home and think of it as a key factor in your retirement plan. By all means, having a paid-for home when you retire definitely puts you in a good position. Since you don’t have rent or a mortgage, it lowers your expenses dramatically. But what happens if you consider your home your whole retirement plan?

Lack Of Retirement Savings

Unfortunately, not everyone saves as they should for retirement. For some, it’s a lack of financial literacy. For others, it’s the inability to save for whatever reason (low income, living in the moment, etc.).

Some people make a conscious choice to skip saving because they’re relying heavily on their home to be their retirement fund. Common strategies people assume will fund retirement when it comes to their homes include:

• Selling the house and downsizing to something cheaper so they can live off the equity.
• Cashing out and moving to a lower-cost area where they rent.
• Taking out a home equity loan, HELOC, or reverse mortgage to cover expenses.
• Renting out the home or turning part of it into an income-producing space.

These options are all possibilities, but none of them should be your only plan for your future. Real estate is an asset, but it isn’t the same as a diversified portfolio or liquid funds. Consequently, relying too heavily on your home as your retirement strategy comes with risks.

Risk 1: Your Home Isn’t A Liquid Asset

Although your home’s equity figures into your net worth, it isn’t cash. You can’t use it unless you sell, borrow, or rent your house, and these things come with limitations.

First, it isn’t a guarantee that you’ll be able to sell when you need to or for the price you need. Market conditions, a recession, construction, and any number of other factors could throw a wrench into your plans.

Trying to borrow against your home equity also isn't a surefire way to fund retirement. You could face low appraisal results depending on the market or reduced borrowing limits. You could also be denied if your income becomes unstable or too low in retirement.

Reverse mortgages have rules, counseling requirements, and ongoing obligations. And as for renting out part of your home to fund your lifestyle, you have to consider whether you want to deal with the hassle. Being a landlord is a job, and you have to handle repairs, maintenance, and tenants. You also still have to keep up with ever-rising property taxes and homeowners’ insurance. And what happens if you can’t find tenants for long stretches of time?

Risk 2: Your Home’s Value Isn’t The Same As What You’ll Get

If your home is worth $600,000, it’s not the same as having $600,000 in retirement funds. Even if you sell, you still need to pay agent fees, cover the costs of prepping your home for sale, moving, and buying or renting a new place.

Your net available funds will be drastically different, potentially lowering what you’re left with by over 10% or more. You’ll likely walk away with much less than your home’s total value. However, many people neglect to factor this in when they think they’ll just sell their home and live off the proceeds.

Risk 3: You Might Not Have As Much Control Over Selling As You Think

Retirement is unpredictable. You might assume you’ll stay put in your home until the very end, but life happens. Your home might become too much for you to handle, whether it’s increasing yardwork, tricky stairs, or too much square footage.

Perhaps you have medical needs that your home can’t accommodate, or maybe you need to move closer to your adult children or other family. For whatever reason, you might end up needing to sell before you thought you would.

Unfortunately, it might not be a great time to do so in the market. Therefore, you get a lot less than you anticipated from the sale.

Also, don’t forget about the costs associated with owning a home that won’t go away once you pay off your mortgage. You still have insurance, taxes, repairs, HOA fees, utilities, and maintenance, and these costs typically rise over time. If you don’t have a solid plan, these rising costs can shrink your equity before you can blink.

Risk 4: You May Not Be Able To Move

What happens if you’re relying on your home’s equity to be your retirement windfall, but you end up not being able to move? Sometimes, it gets emotional, and people don’t want to get rid of their property. For some, it becomes physically daunting to think about moving, downsizing, packing, etc. You might not want to leave your neighborhood that you’ve grown so accustomed to.

But if selling is the only way to unlock your retirement funds, it puts enormous stress on your shoulders. And this stress comes at the exact stage of life when you want simplicity and relaxation.

Risk 5: Your Home Won’t Cover Expenses

If your house is paid for when you get to retirement, the only thing that’s covered is the roof over your head. You still need income for food, utilities, maintenance, clothing, medical bills, and anything else you need or want in retirement.

A retirement portfolio generates income through dividends, interest, and withdrawals. This is why it’s so important to develop a well-rounded retirement plan that gives you what you need when you need it.

Your home can certainly add to an impressive net worth statement, but it doesn’t function like a traditional retirement asset. Therefore, don’t put too much of the burden of your retirement plan on your home equity.

The Difference Home Equity Makes In Your Net Worth And Retirement Projections

Consider this example to see how home equity can drastically skew your net worth in relation to retirement readiness.

Imagine Sue and Jan each have a net worth of $900,000 made up of their home equity and 401(k) accounts. They each own a fully paid-for home. Sue’s home is worth $500,000, and Jan’s is worth $200,000.

In this example, Sue might have the higher home equity, but Jan is in a better position to retire. Jan has $700,000 in liquid assets, while Sue only has $300,000. Of course, there are nuances, but this is just keeping things simple to illustrate how home equity influences net worth.

How to Reduce The Risks Of Counting On Your Home For Retirement

Despite all the risks, your home can still be a powerful part of your retirement plan. But don’t make it your whole plan.

Here are the scenarios where using home equity is most effective:

1. Downsizing Early

Selling while you’re still in your 50s or 60s can give you more flexibility. You’re younger, so better able to handle the physical tolls of moving. You don’t feel as much pressure to sell, which can help you maximize the sale price.

Selling your home earlier also helps you reduce upkeep and free up cash sooner, so you can invest the proceeds for longer. Bonus retirement points if you can move to a lower cost-of-living area to boost your retirement savings and make it stretch farther.

2. Consider Your Home Equity As A Backup

Instead of relying on home equity to be your primary strategy for funding retirement, think of it as more of an emergency reserve. It could also be your backup plan for long-term care needs. 

3. A Reverse Mortgage Is Possible Only If You’ve Researched It Thoroughly

Reverse mortgages can be beneficial in the right situations, but they require careful consideration. Talk with a financial expert to help run cost analysis scenarios and plan for taxes and inheritance implications.

Your Home Should Be Part Of Your Retirement Plan, But Not The Whole Plan

Your home is a valuable part of your financial picture, but it shouldn’t be your entire retirement plan. It’s a valuable asset, but it also comes with risks, which makes it especially precarious to place your entire future on it.

If most of your net worth is tied up in home equity, now is the time to think through other options. Strengthen your liquid savings and consider multiple paths forward, viewing your home as more of a backup plan instead of the only plan.

The goal isn’t to stop relying on your home altogether, but make sure you’re not relying on it too much. The best way to get to a comfortable, confident retirement is through having options, planning, and creating a well-rounded, diversified savings strategy.

Related Guides:

• When Should Seniors Consider Selling Their Home?
• Eight Reasons Downsizing Might Cost You More Than You Think
• What To Consider Before Renting Out A Room In Your House