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Could Your Home Help Fund Your Retirement?

Many people live in their most valuable asset. Here’s how your home’s value could help you retire on your terms.

FOR THOSE NEARING RETIREMENT, few questions loom larger than whether to sell or keep the family home. Will you remain in a house full of memories, where you may have raised your kids, celebrated holidays and lived the greater portion of your life? Or are you looking forward to setting up a home somewhere new? Beyond the emotional considerations, the choice has major financial implications: The decision to move or stay put could mean either major costs—or significant savings—for you.

The average 65-year-old has 47% more mortgage debt than 65-year-olds had in 2003, according to the Federal Reserve Bank of New York.1 Still, after factoring in the equity you hold in your home, you may be far better prepared for retirement than you thought you were. “The equity you’ve built up could be one of your most valuable retirement assets,” says Debra Greenberg, a director of Retirement and Personal Wealth Solutions at Bank of America. “That’s why it’s essential to carefully think through the role it will play in your finances after you retire.”

“How much equity you have and whether your mortgage is paid off, as well as the strength of the housing market in your area, are all things worth considering as you figure out how your home can help you live the life you’ve always wanted in retirement,” Greenberg adds. Here’s how to factor your home’s value into your planning.

READY FOR A CHANGE

The financial benefits of relocating: Selling your home may be the most direct way to unlock the equity you’ve built in your house. It can also free you up to seek a new location with lower taxes and living costs. Downsizing your house could carry additional upsides, such as reduced maintenance costs and lower utility bills, both of which could help your income go further.

“The equity you’ve built up could be one of your most valuable retirement assets. That’s why it’s essential to carefully think through the role it will play in your finances.”—Debra Greenberg, Director, Retirement and Personal Wealth Solutions, Bank of America

It’s important to remember, though, that housing prices can dip, as we learned from the Great Recession, says Michelle Meyer, head of U.S. Economics at BofA Global Research. If you’re nearing retirement and plan to move in the next year or two, it’s a good idea to keep an eye on home sales in your area and maybe even hire someone to assess the likely value of yours.

When you do sell your home, “if you feel you need some extra income in retirement, any profit could be invested to provide the potential for growth,” says Greenberg. While homes, like other assets, are subject to capital gains taxes when their cost has appreciated at the time of their sale, those taxes generally don’t apply to the first $250,000 of capital gains ($500,000 for a married couple) on your primary residence if you’ve lived in it for two of the past five years. (Consult your tax advisor on how this might apply to your situation.)

As for how to put to work your newly freed cash from the sale of your home, think carefully about the mix of investment choices you plan to make. You’ll want to try to counteract the potential that inflation has for taking an ever-increasing bite out of your retirement income. One way to do that is to consider a diversified mix of investments that offer the opportunity for paying dividends (stocks) and interest (bonds) and that align with your risk tolerance, liquidity needs, time horizon and goals. If you are considering investing the proceeds from the sale of your home, keep in mind that there’s always the risk that the investments you choose could decrease in value.

Potential drawbacks: Moving can be expensive. Closing costs, broker’s fee and possible state and local taxes can eat into the money you get from selling your home. And packing up a lifetime of stuff can be stressful, requiring lots of time and plenty of physical labor as well as standard moving costs.

HAPPY WHERE WE ARE

The financial benefits of staying put: If you’ve paid off your mortgage (or are about to), one advantage of staying in your current home may be the significantly lower housing expenses. The savings could help stretch your retirement income further and free up cash for other expenses, including preparing your home for a long retirement. They could also allow you to make age-friendly improvements on your home, such as installing a new kitchen with lower, more accessible cabinets or adding a first-floor bedroom or a bathroom with a roll-in shower, which could make it easier for you to stay in your home as you grow older.

“Your home’s stored-up value could also help you meet your cash needs,” says Marie Imundo, director of Wealth Management Mortgage Strategy and Execution at Bank of America. “For example, a home equity line of credit (HELOC) could be there for you in case you face large-scale medical expenses, much needed home repairs, or another emergency—thus enabling you to leave your retirement savings and investments in place while you address your current needs.”

Your home’s stored-up value could also help you meet your cash needs. For example, a home equity line of credit could be there for you in case you face large-scale medical expenses.—says Marie Imundo,Director, Wealth Management Mortgage Strategy and Execution, Bank of America

Weigh the choice to draw upon a HELOC carefully, though. Doing so will reduce your home equity, and the interest you pay on it will not be tax deductible unless you use the funds to substantially improve your home.2 And, if you lack the liquidity to make required loan payments, drawing on your investment accounts could reduce their growth potential. Your financial advisor and tax advisor can help you determine whether a HELOC is right for your situation and needs.

Potential drawbacks: Using funds from a HELOC to make extensive renovations to your home could mean high monthly payments. And don’t forget your ability to do the work that goes into maintaining a home. Even chores such as mowing the lawn, cleaning gutters and repainting, which may seem manageable today, could become difficult as you age. You might have to pay someone to do many of the things you’re currently doing yourself.

As important as the financial considerations are, you’ll ultimately have to base your decision on whether to sell your home on your own personal goals, priorities and dreams. When all is said and done, if you base your decision on the things you hold most dear, wherever you end up will feel like home, says Greenberg.

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1Federal Reserve Bank of New York, “The Graying of American Debt,” February 2016.

“Interest on Home Equity Loans Often Still Deductible Under New Law,” IR-2018-32, Internal Revenue Service, last updated June 28, 2019. You may be able to deduct the interest on a total of $750,000 of loans you take out on your home (including any mortgages).

Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisor before making any financial decisions.

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