What Happens When Your Retirement Plan Depends on Selling the House?
For many people, a house is their most valuable asset — but it may also be a vital part of their retirement plan.
Americans who are Baby Boomers and older are sitting on $13.8 trillion in housing wealth, according to Realtor.com. That means some may be planning to sell their homes to unlock cash and transition into a smooth retirement. Others may have to turn home equity into a retirement funding source. Here’s how to navigate having your house be a main part of your retirement plan.
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Why the house becomes the retirement plan
Homes have appreciated considerably over the past few decades, and some people have more wealth in their homes than they do in their retirement accounts. Retirees can tap into home equity to cover various expenses, but it’s different from withdrawing funds from a 401(k).
Using home equity reduces your stake in your home and also comes with interest. You have to borrow against your home, which requires taking out a loan. That entire process can take multiple weeks. Some retirees may even live longer than they expected and end up running out of home equity. If there is no plan B, retirees can be forced to make very difficult decisions while having limited options.
This is why many retirees opt to downsize. You can move from a high-cost market to a smaller home in a lower-cost area. Some empty nesters may welcome having less space or living in a one-floor home so they don’t have to worry about stairs. That way, you free up cash without borrowing against your home.
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What can go wrong when you need to sell
Although retirees with homes can have meaningful wealth stored in their properties, they need to find a buyer who can pay at the current price — and find a new home at the right price for them. A poor housing market, high selling costs and challenges in finding and buying a new home could throw a wrench in their plans.
Even with this economic reality, some people may not want to sell their homes. They may feel attached to the property, community or other elements of their neighborhoods. While it can make sense to stay put if you can afford to, some people may need to downsize to preserve their finances — even if they don’t feel ready to move.
How to make a home-equity retirement plan safer
Selling your home can lead to a financial windfall, but you still need a place to live. Assess how your costs will change if you downsize into a smaller home, live in a rental or opt for a senior living arrangement.
It’s a good idea to plan this type of move years in advance so you aren’t caught off guard. A financial planner can help you navigate the move and forecast how it can affect your finances.
Some people find alternatives, such as renting out a part of the home or multi-generational housing. A retiree’s adult children may struggle with current housing prices, and having them live with you can make costs more manageable for everyone if the entire family is on board. It’s also important to save for retirement outside of your home, including in retirement savings accounts such as 401(k)s and individual retirement accounts (IRAs). That way you aren't fully reliant on your home to allow you to enjoy a comfortable retirement.