Many retired people have discovered that Social security and their retirement funds (IRA, 401(k) and other retirement vehicles) are not enough to support the lifestyle they envision. So, how can you find more ways to keep your retirement on track?
One idea is to use your home as your personal bank. Most retirees own their home outright or have small mortgages, and retirees need to consider when and if to start using their home for retirement funding.
Using Your Home as a Retirement Funding Source
If you are a long-time homeowner, your equity has increased, even with the housing crisis of 2008 -2009 which we are still recovering from, though many markets now have a housing shortage where buyers receive multiple bids and often sell in some places for more than the listing price.
The equity in your home could be an astounding amount, that if invested elsewhere could yield a great return.
Sell, Buy, or Rent?
The easiest way to access the cash in your home is to sell and downsize to a new home. Back in 1997 tax laws changed and allow a single person to net $250,000 ($500,000 for a couple) on home sale gains tax-free.
Sell and Buy
So, if you sell and buy another smaller, less expensive home with a 30-year mortgage, you can use the remaining cash to invest. What all your investment from the sale of your home needs to do is cover the cost of your new mortgage.
There is some risk though in selling and buying again – it is that at a time we want to cut debt so retirement is easier, we are signing up for increased debt over the rest of our lives. Later, we will look at ways to protect us.
Sell and Rent
If you just don’t want the hassles of home ownership anymore you sell your home, invest the gains, and rent an apartment that meets your needs. Is this a plan you can buy into?
One note of caution if you’re thinking of this as a source for retirement funding remember that unlike mortgage payments which don’t change unless you refinance, rental payments usually go up every 12 months.
You need to be confident that your investment income will cover your rental payments and increases.
Other Ways to Use Your Home to Fund Your Retirement
You could stay put and still get to your equity when and if you need to. Two good options for accomplishing this are a home equity line of credit (HELOC) or a Reverse Mortgage.
What is an HELOC?
An HELOC is simply a line of credit against the equity in your home. It is a loan, and must be paid back starting thirty days after you begin to use it. An HELOC is great for emergency cash, but if you need to use it for living expenses, not so much, as you probably will be unable to pay it back.
Is a Reverse Mortgage Right for Me?
A reverse mortgage gives you monthly payments against the equity in your home. It is untaxed and does not need to be paid off until you pass or sell your home. If you have a reverse mortgage, you never owe more than the equity in your home even if the value of your home goes down.
Next Steps
Before you do anything speak with your tax advisor, real estate advisor and a certified financial planner or certified retirement planner. They can advise you on the opportunities and cautions for using your home as a source of funds for retirement.
Options include using your gains to buy a fixed annuity that gives you payments monthly for life, low-risk investment opportunities, and other ways to keep your retirement going the way you want it too.
Using your home as retirement funding vehicle is a major decision. Only you can decide on how, when, and if you will use your home as a funding source for retirement. Seek professional help (no, not a psychiatrist – a certified financial planner) from experts to make sure your decision is an informed one.
