How Should I Use My Home Equity For My Retirement?

There is plenty of information and advice about when to retire and take social security, but very little about managing your home equity with a view to retirement.

How to use your home equity

Equity in your home is a big part of your overall portfolio. If you are married, this is approximately 70% of your non-liquid assets per a 2009 Society of Actuaries (SOA) Report. The report also states the median value of financial assets is less than 1.5% of the median middle class income, which is $75,000, and three times the median upper income households which is around $132,000.

The report did exclude the value of Social Security and pension benefits which would reduce the home equity percentage as a part of total assets. The report is also based on a 2004 Study of Consumer Finances, which of course is far removed from today’s figures.

However, the figures are relevant because home equity and how it is financed is a large part of retirement planning.

The author of the SOA report, Anna Rappaport, states that housing costs account for approximately 35% of a homeowner’s budget before they retire which is high.

As high as home equity is, many Americans don’t take this into consideration in the retirement planning, and the usual methods people to accomplish their goals, don’t factor this into the equation.

So, what should be done with the 70% of assets tied up in your home?

There is no real agreement on this and there are so many variables to consider, but a template could be the following:

  • Pay off your mortgage and reduce expenses
  • Downsize, and take the cash for investment
  • Sell your home, rent and invest the cash
  • Take out a reverse mortgage which is going to give you an income
  • Rent out rooms
  • If you can get enough rent you could rent the house and find a less expensive rental for yourself, keeping the extra cash for investment

Some of these options may work and some, like reverse mortgages, can be risky.

The home equity model is complicated and work needs to be done to fine-tune it to work for most Americans.

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