The residence usually is one of the most valuable assets retirees own.
It also is one of the worst-managed assets.
Few people realize the home can be used to increase retirement cash flow or know how to do so efficiently.
In the past issues of Retirement Watch, we’ve gone over reverse mortgages and issues related to moving in retirement.
Let’s put these topics together to consider how to make the best use of home equity in retirement income.
While your house is your home, it also is both one of your most valuable assets and your highest expense.
Most people consider their home equity primarily to be left for their children or to be used in a pinch to pay for long-term care or high medical expenses.
Instead, consider how it can be used for your financial benefit.
The first strategy to consider in making your home equity a retirement asset: is downsizing.
Downsizing is moving from your current home to one that costs less and is less expensive to own.
To many people, downsizing is moving to a smaller home, but that’s not necessarily the case.
If you move to a less expensive area, you can purchase a home that costs less to buy and own without being smaller than the old home.
Downsizing can have two benefits.
First, downsizing creates additional liquid assets.
You sell the old home and purchase a new home that is less valuable than the old home.
The difference is cash in hand for you that can be invested to generate additional retirement cash flow.
Or you can use it to pay debt.
Either way, eventually it increases retirement cash flow.
The trick is to not overestimate the amount of cash downsizing will create.
It costs money to buy and sell homes and move your goods to the new home (or acquire new furnishings and accessories).
Many people overestimate the cash they’ll net from selling their old homes.
As such, they often “downsize” to a home that’s more expensive than they really should have purchased.
The result is a lot of real estate activity without increasing their nest eggs by much.
A good rule of thumb in most areas is that the costs of buying, selling, and moving will cost about 10% of the value of your current home.
Second, downsizing should decrease your monthly expenses.
You’ve moved into a home that’s less expensive to own, so your monthly cash flow available to pay for expenses other than housing should increase.
Downsizing also could have nonfinancial benefits by making your life easier and less stressful.
You’ll have less home to clean and maintain.
It also might be easier for you to move around the home, and the neighborhood might be more suitable to this stage of your life.
In next week’s issue of Retirement Watch Weekly, we’ll discuss more ways to make your home equity more of a retirement asset.