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We know the equity in a home can be important and is part of net worth. It can be used to purchase with cash when downsizing. It can be sold and the cash used for living expenses – tax-free income up to a point. It can be used as income via a reverse mortgage. It seems a growing number of seniors are using home equity to pay an entrance fee to a CCRC. Or it may be part of inheritance.
But those strategies require the ability to sell. Prices keep rising, but we are also told it is becoming very difficult for younger families to afford today’s prices. In some areas, required down payments are 5% or less just to make a house available to purchase.
When we sold our family home in 2018, it took longer than anticipated and the price was $70,000 less than needed to cover the cost of our condo. Doing so today may well be more difficult.
The good news is the selling price for our condo today has increased about 60% and they sell quickly in our 55+ plus community. But will that continue?
So, the question becomes, how important is home equity as part of your retirement planning and what creative ways are you (planning to) using it?
Do you have concerns that changes in the real estate market may upend your plans?
No.
we consider our CanDoMinimum to be shelter and NOT an investment.
I have no plans to use my home equity for living expenses, but it is core to the inheritance I will leave for my wife. She’ll sell the place when I’m gone and have her nest egg all set.
With regards to selling, real estate markets move up and down just like equity markets, and we’ve found there’s not much point in trying to predict them. We certainly didn’t anticipate that the Covid shutdown would ignite a frenzy for coastal properties that had realtors from hundreds of miles away literally pounding on our door and incented us to sell. At a different time we’d had the house on the market for a year and a half with no buyers.
I assume my wife will simply wait for the right time.
If she sells for the nest egg, what’s the plan for a place to live?
It probably shouldn’t be THE plan but it should probably be part of the mix even if it’s as asset of last resort or the logical source of funds to pay into CCRC or regular care. And geo-arbitrage is a thing if you can fight the human nature of the “downsize but upsize in comforts” thinking.
I know reverse mortgages are far from the optimum financial deal in pure $ terms but in lifestyle terms if it came to it I don’t think I’d have a conceptual problem once I hit my 80s. Though I guess I’d far more likely to be looking at “sell to rent” in such circumstances. Thus they are another moat that can be considered added to the “castle” of a lived retirement.
To answer directly, “no.” And I think for good reason, which your story helps illustrate.
My FIL, who taught me personal finance, always counseled to not include home equity in your net worth. While it’s a part of net worth technically, it’s not the same as retirement savings unless you sell the home or draw out equity using debt. And if you sell, you still have to live somewhere.
What I found, which your story confirms, is that when changing homes people become accustomed to living in exactly the value homes they live in. What this means is if you’re accustomed to living in a $500,000 home, when you go to sell you’re very likely to buy another $500,000 dwelling. Same for a $1,000,000 dwelling. It’s very difficult to go down in home value, even when “down-sizing.” Even if you buy a smaller dwelling, you’ll likely go up in quality or desirability.
Therefore, it can be a fool’s errand to count home equity in your retirement plan because the equity will likely be used to buy your next dwelling, and cannot be used to fund retirement income. Of course, you can use a reverse mortgage to tap home equity, but I would advise that as a last resort.
In some ways I would say that our case is an exception to the argument against considering one’s home part of one’s net worth while in other ways one could argue that our current circumstances confirm the notion that the price of one’s retirement home will likely be similar to the price of their pre-retirement home.
We sold our owner occupied 4-family Brooklyn brownstone in 2019 for $3.55 million (we purchased it for $960k in 1999) . Because our 2,000 sq ft apartment comprised 3 of the 5 floors, our personal home’s sales price was $2.13 million. While we loved living there our home wouldn’t have been considered luxurious in most parts of the country. We had two bedrooms, 1.5 baths, appliances from the 1980s, minimal closet space, window air conditioners and a 400 sq ft back yard.
When we took a try at retirement in Raleigh, NC in the summer of 2019 we purchased a 3,400 sq ft ranch with a walkout basement for $485,000 that in many ways felt like a step up (our first refrigerator with a water dispenser). Thus, at this point in our retirement, the net proceeds from the sale of our brownstone had substantially increased our investment portfolio.
In 2023 we decided it was time to move into a CCRC and opted to move back to the NYC area–Westchester County. We were fortunate to benefit from the run-up in prices and sold our home in Raleigh for $713,000. Our net proceeds from the sale of our homes were a major factor in our ability to pay the hefty entry fee of $1.1 million (90% refundable) for one of the nicer apartments in a new upscale university-based CCRC that we moved into in December of 2023. Thus our current situation is more consistent with the notion that one shouldn’t consider home equity part of net worth, although there is still a significant amount in our portfolio from our home sales that helps to finance our retirement expenses.
I agree about home equity and net worth. I took that position in a post a few months back and was beaten up nearly as bad as cartgate.
My view was home equity should not be considered net worth for retirement purposes simply because it is not liquid and you still have to live somewhere. needless to say it is technically part of net worth.
https://humbledollar.com/forum/is-your-net-worth-worth-it-and-whats-in-it-rdq/
After the CCRC called to offer us an apartment we loved, we had a full cash offer on our mortgage-free house two days after it went on the market. Our sale proceeds covered the buy-in fee with a big chunk left over to add to retirement savings. The strategy that worked for us when we moved to Florida was buying a dated fixer-upper in a good neighborhood and having modest renovations done right away so we could enjoy our updated home for the next seven years. During the last three years, we went on the CCRC waitlist and started getting rid of excess stuff. We followed the guidance of our RE agent for simple de-cluttering and staging before the photos were taken. In our neighborhood, there were a lot of houses that really needed updating and sat on the market for months, ultimately selling for far less per square foot. So my advice is not to wait for “one of these days” to do a few improvements.
We made the decision to live mortgage free by liquidating assets to build our retirement home. Do we think about what “has it appreciated”? Sure. But the truth is that value is our built in inheritance for our two children, so the actual value (+/-) isn’t really all that. significant to us. They’ll inherit a tidy sum. And if we should need it for care later on – it’s plenty. We worked hard, we’re savers and have been truly blessed with good fortune.
when you liquidated assets does that mean from funds to be used in retirement thus trading liquid assets for the benefit of no mortgage?
We earmarked the equity in our primary residence as a contingency fund for long term care or health care related spending shocks in the last stages of our lives.
I have already used the equity in my house. It covered most of the entry fee for my CCRC. That’s after over two decades of rent-free (although of course not maintenance-free) accommodation.
Being 10-15 years out from retirement, a paid-off house is only important in that we don’t have rent or mortgage payments to consider.
But we certainly don’t count the house value in our retirement savings. Our aim is to have a secure retirement income with no consideration of our house.
We consider the equity in our two debt-free homes to be the ‘icing on the cake’ of our finances. Since we have no immediate need to tap into it, we plan for this valuable asset to eventually be utilized for long-term care expenses or to contribute to our family’s inheritance.
As they say in real estate, “location, location, location”, and we have that. I would like to eventually sell our house and use the proceeds to rent or buy elsewhere.
Houses in this neighborhood don’t stay on the market long, so I don’t think we’d have a problem selling. Even now, any house I check on Zillow has sold above asking price.
I like our house, but I can see a split-level with six different levels being a problem to navigate in old age, and it’s too much house for us anyway.
Can’t imagine why that got down-voted. I up-voted to undo it. I agree – you don’t want stairs when you get older. Not only are aging knees likely to complain, the chance of falls is greater. Living in a CCRC, I have learned that you can do a lot of damage with a simple fall when you are older.
We have an opposite view of our stairs — they’re a fitness aid!
But we also made it a point to buy a house that will allow for the easy installation of an elevator or a stair lift if necessary.
We don’t want to move under any circumstances.
They may be a fitness aid until you can’t climb them. If you are lucky, it will be “if” but if you are typical, it will be when.
I had that attitude about moving too. We were in our home for over 40 years and raised our four children there and family events and holidays with grandchildren.
However, I wish we had moved sooner. The memories came with us and our condo is still big enough for the family gatherIngs. We stayed within 7/10 of mile so nothing really changed community wise.
But I don’t worry about snow, leaves, repairs, water leaks and our monthly home expenses are fixed each year in advance via the HOA fee.
I agree . We live in a 2 1/2 story house— not including the basement. We had our contractor reinforce all our railings — and we use them! Going up and down stairs isn’t a problem for either my husband or me. But we don’t carry laundry and other similar loads up and down. Our washer and dryer were moved to the second floor several years ago. We also don’t try to lift heavy suitcases, etc up the stairs. We’re careful, but use the stairs as a form of exercise.
Also— it would be possible to live on the first floor of the house. There is a room th as t could serve as a bedroom , and off that, a bath with walk in shower, There is a place for the washer/ dryer on the first floor,
The lack of stairs is 90% of why we sold and moved to a condo. The balance was because of the hassle of inside and out maintenance.
Our families have used the paid off home to help pay for our grandmas’, and now our moms’, end of life care. We plan to do the same for whichever one of us is left. We have already moved to an empty nester/first time homebuyer type home. But I think you raise a good point in that we are counting on our neighborhood to still be an attractive and desirable place to live in 25 years. A lot can change. Chris
At 73 and 70, with guaranteed income covering most of our spending, and adequate IRA accounts waiting in the wings, I don’t see us needing to tap into the house for a long time. Like you say, who knows what the RE market will be in 10 or more years. It is a comfort for us to know that we are mortgage free and have home equity if there’s a need.
Dan,
We are in a similar situation where our Social Security income will cover most, if not all expenses. Our house is about 30% of our net worth. If we were to go into a CCRC I believe our home value would cover most if not all of our buy in with Social Security covering the monthly fees. If we continue to get our past 10 year return of roughly 8% on our portfolio most likely it’s value will stay about even except for RMDs which wouldn’t necessarily have to be spent.
David, you must live in a low cost area of the country based on the living expenses SS can cover.
Our combined net SS benefits would not cover much more than half the monthly local CCRC fee.
I don’t know where Dave lives. We live in NW Ohio, where the cost of living is indeed low.
Those significant variations are something we need to keep in mind during many HD discussion related to lifestyle and retirement living.
Our income may be more than adequate in OH, but not necessarily in NJ for example.
just up the hill from us one bedroom apartments are $5,000 a month. A few blocks away there are houses with property taxes of $25,000 a year. Large homes, but not that large.
Wow! Amazing how things vary, even within the same general region. Now I understand even more clearly why several of my neighbors left upscale NJ towns and homes.
The state is trying to pay us to stay. There is a program now where the state will pay 50% of the property tax bill next year up to $6,500 for couples earning up to $500,000 a year. If I was inclined to leave, I doubt that would keep me in NJ, but my family has been here since at least the 1840s and we aren’t going anywhere.