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 house 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 in the Personal Retirement Solutions Group at Bank of America Merrill Lynch. “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 equity you’ve built in your house. It also frees you up to seek a new location with lower taxes and living costs. Additionally, downsizing your house could carry upsides such as reduced maintenance costs and smaller utility bills, all 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, Personal Retirement Solutions Group, Bank of America Merrill Lynch
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 Merrill Lynch 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 upon their sale when they appreciate, 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 your newly freed cash to work from the sale of your home, think carefully about the mix of investment choices you make. You’ll want to try to counteract the potential 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 your expected windfall. 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 significantly lower housing expenses. This could help stretch your retirement income further and free up cash for other expenses such as preparing your home for a long retirement. Improvements may range from a new deck or the kitchen of your dreams to a first-floor bathroom or bedroom.
Your home’s stored-up value could also help you meet your cash needs. For example, a home equity line of credit (HELOC) could be there for you in case of 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 of large-scale medical expenses.
Weigh this move carefully, though, says Greenberg. A HELOC will reduce your home equity, and the interest you pay on it is no longer tax deductible unless you use the funds to improve the 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: Extensive renovations made with funds from a HELOC could mean high monthly payments, and the physical layout (steep stairs or an arduous climb from the driveway) could make adapting it for later years too costly or difficult to consider. And don’t forget 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 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.
3 Questions to Ask Your Advisor
- Given my situation, what are the best ways to invest any cash left over from the sale of my house?
- Could a home equity line of credit (HELOC) provide the cash I need in case of unexpected expenses?
- How will my plans to move or stay put affect my ability to meet daily living expenses?
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2 Internal Revenue Service, IR-2018-32: Interest on Home Equity Loans Often Still Deductible Under New Law. You may be able to deduct the interest on a total of $750,000 of loans on your home (including any mortgage).
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