When envisioning a prosperous retirement, investors traditionally emphasize building diversified portfolios consisting of stocks, bonds, and mutual funds. However, a substantial asset class is often overlooked: real estate, particularly the home you own and live in. With real estate markets thriving across many regions, the financial potential of homeownership is not just a critical, but a secure and stable component in retirement planning.
Reassessing Your Most Valuable Asset
Vanguard research reveals a significant statistic: approximately 80% of Americans over the age of 60 are homeowners, with housing wealth making up nearly half of their median net worth. The equity built in these properties—where many currently reside—represents a substantial, yet often underutilized, asset and source of retirement income.
Over the past several years, the real estate market has experienced notable growth, with home prices rising in numerous areas across the United States. This surge has transformed principal residences into valuable investments. Despite this potential for high returns, the real estate market remains considerably undervalued in traditional retirement planning.
Strategies for Leveraging Home Equity
The equity accumulated in your home can be a cornerstone of your retirement strategy. Several approaches can help you tap into this asset effectively, each offering unique advantages depending on your individual retirement goals and financial situation. This flexibility and adaptability give you the power to shape your retirement plan.
- Downsizing: Selling your home and moving to a smaller, less expensive residence can unlock substantial cash, boosting your retirement savings. This option is desirable if you no longer need as much space or if you desire a lifestyle change, such as relocating to a warmer climate, a more urban setting, or closer to family.
- Reverse Mortgage: Homeowners aged 62 or older can consider a reverse mortgage, allowing them to convert a portion of their home equity into cash while continuing to live in their home. The loan and accrued interest are repaid when the homeowner sells the house, moves out permanently, or passes away. While this can be a viable solution for some, it’s essential to remember that it is a loan, and the accumulating interest can significantly reduce your home equity over time.
- Rental Income: Renting out a portion of your home or the entire property can generate a steady income stream during retirement. However, it’s crucial to account for the costs and responsibilities of being a landlord.
A Strategic Decision
Deciding to leverage your home for retirement should not be taken lightly. Various factors must be considered, including tax implications, the state of the housing market, personal lifestyle preferences, and the potential risks associated with each option. Consulting with financial advisors, real estate professionals, and possibly legal counsel is not just important, but crucial, to strategically understand and fully utilize this substantial asset. Their guidance and support can make a significant difference in your retirement planning.
While market trends and individual circumstances vary, one fact remains: for many Americans nearing retirement, their home represents a significant portion of their wealth. As such, it deserves careful consideration in any comprehensive retirement strategy. As the saying goes, “home is where the heart is,” but given recent trends, it might be time to add, “and also where a significant portion of your retirement assets reside.”
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
