Why Your Home is a Retirement Asset
In the past, retirement consisted of social security, pension plans and retirement savings including 401(k) plans. Pension plans are relatively non-existent today, leaving a gap in income for many retired Americans. Fortunately, there’s another retirement asset many retirees overlook – your home.
Here’s how retirees can use a home to boost retirement income.
Pay Off Your Mortgage
People who are on track for retirement or on their way to paying off their home by the time they retire. Having your home paid off, means needing 16 to 30 percent less income when you retire. For those who spend a larger portion of their income on housing than the average, this could mean even greater savings during retirement.
Mortgage interest savings are risk-free. Not having a mortgage payment in retirement reduces the amount you need to withdraw from your portfolio, and depleting your savings. While some might argue that it’s better to invest savings rather than use it to pay down a mortgage faster, there’s a compromise. Plan to make payments that will help you pay off your mortgage by retirement, but not sooner. Use the rest of your savings to invest and yield returns. To help pay off your mortgage by retirement you can schedule your payments accordingly, refinance to a shorter mortgage term, or make extra payments.
You may decide to downsize once your children retire. Less house often manes less mortgage, and lower monthly payments. A smaller home can also mean lower utility and maintenance costs, which will also help with retirement.
Instead of investing the money you receive from selling your home, it may benefit you to rent it out. Being a landlord comes with its own set of costs and risks, but you may have more time to deal with these during retirement. If your home is large enough, or you have a back house, you could earn additional income by renting rooms on sites like Airbnb and HomeAway.
A reverse mortgage is when the bank pays you. Unlike a home equity loan or line of credit, you have to be at least 62 years or older to take out a reverse mortgage. You don’t need to pay the loan back as long as you’re living in the home. If you retire before becoming eligible for Medicare at age 65, and plan to purchase health insurance through the Affordable Care Act, a reverse mortgage may be beneficial for you. Subsidies under the program are based on your taxable income. Reverse mortgage payments aren’t taxable, so they won’t count against you and you can qualify for higher subsidies creating lower health insurance costs.
You can use a reverse mortgage for income when your portfolio is down in value or when you need extra cash, and taking it from somewhere else would put you into a higher tax bracket.
As you look for funds during retirement, don’t overlook the value in your home. Your home may be your most valuable retirement asset.