Your home’s equity should be part of your retirement plan. But, first, think about what a home means to you. When you retire, do you want to remain in your current home because of its memories, convenience or community? Would you move to a neighboring town or even another state to take advantage of lower property taxes?
It’s enticing to think of paying off a mortgage, selling a home and retiring with a profit that fills an income gap. CNNMoney reported last October that Bill and Sheri Pyle sold their three-bedroom home in Chicago for $185,000 and moved to Tennessee where they bought a $128,000 four-bedroom ranch house. The Pyles say they lowered their property tax from $7,000 to $500 per year and paid off a car loan. And, for now, the couple says they haven’t had to touch their $400,000 in retirement savings.
But downsizing could mean less cash in retirement than you think. For starters, people generally aren’t realistic about the costs they’ll incur when they move. For example, you may buy a smaller home; but, a smaller home can be more expensive than the property you sold if you’re relocating to a popular area. You could have far less square footage and property to care for. But you could be paying for community assessments and association dues if you purchase a condo. And if you retire to a golf community, you can incur monthly minimum charges for things like dining.
Some couples also assume that the equity in their home will pay for nursing care should a spouse become sick. But remember, selling your home in a rush to unlock equity still leaves you with a question: Where will your healthy spouse live?
The reality is most people have a hard time selling their home. Emotions get in the way of objective planning. Or they realize too late that they aren’t going to get the price they feel their house is worth.
While owners put a premium on the good feelings a house provokes, buyers don’t. The current working generation doesn’t believe a home is one’s greatest asset. Many people in their 20s, 30s and 40s with whom we meet don’t seem to fall in love with a home the way past generations have. So they’re less likely to stretch their financial resources to pay the price a seller believes his or her home is worth.
So what’s the best way to factor your home’s equity into your retirement plan? First, realize your home is only worth what someone is willing to pay for it. Next, define the property you’re looking to retire to and add up the costs. A 1,500-square-foot condo in a beachfront community could easily cost more than your spacious four-bedroom home on a five-acre lot. Third, create a spreadsheet outlining, for example, what it would cost to hunt for a new home, sell your home with a real estate agent and move the furniture you want to keep.
This will help you deduct your home’s emotional equity from its financial equity, so you can make a realistic retirement plan.
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