The role home equity plays in retirement

Many experts warn against viewing home as a pension and borrowing against its value for income


Many retirement experts have a message for all the 50-somethings who are feeling smug watching their home's value multiply: Stop it.

Whether home equity should be counted as an asset that can provide retirement income is a hotly debated topic, said Rob Bennett, of Purcellville, Va., who runs the Web site

Baby boomers, notorious for poor savings habits, might be relying on their housing wealth to compensate for paltry 401(k) balances.

A recent study by the Spectrem Group of Chicago found that even among affluent baby boomers with investments of $500,000 or more about 63 percent intended to finance their eventual retirement by selling their primary residence.

Many financial planners, however, say that a house is an asset to be lived in, not a retirement fund.

`A reserve source'

"You shouldn't look at equity as a retirement fund, but it is a reserve source of funds to keep in the back of your mind," said Steven Weydert, executive vice president of Bowyer, Weydert Wealth Planning Partners Inc.

A home is a "backup," a source of funds that can be tapped if other retirement savings run dry, said Bruce Brinkman, of Timothy Financial Counsel Inc.

In fact, instead of planning to borrow against a house to finance retirement, Brinkman said it's often wise to pay off a mortgage before retiring.

"The big thing in retirement is cash flow," he said. "If you can keep your housing expenses down, it's easier to live off a fixed retirement income."

Steep home debt

But many boomers, especially the younger ones born between 1955 and 1965, have so loaded up on mortgage debt that it's unrealistic for them to try to be mortgage-free by retirement, said Barbara Butrica.

She co-wrote a study last year on baby boomers' retirement for the Urban Institute, a research group in Washington.

Those who won't be able to afford the mortgage and expense of their homes on a retirement income, or who need to convert their homes' value to cash to compensate for limited savings, must realize their plans involve "a big lifestyle decision," Brinkman said.

There's nothing inherently wrong with selling a house to take profits or get rid of heavy debt. Owners simply must be prepared to move to a less expensive place, planners say.

So far very few retirees have embraced "economic downsizing," which means moving into a less expensive home, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

The idea may be difficult to implement, she said.

Middle way

Instead of ignoring your home equity or depending on housing wealth to carry retirement, maybe it's best to take an approach in the middle, said Bennett, of

Because he retired early, Bennett withdraws no more than 4 percent of the value of his investments. But if he needs more money, "I allow myself to take up to 2 percent of my [home] equity."

Running tab

Bennett keeps a running tab on his home's value. He considers this a conservative strategy, because he will only spend 2 percent of equity if his home value keeps climbing more than 2 percent.

Moreover, equity represents less than half of his assets. And, he said, he might ultimately sell his house and realize some cash gain.

Financial planners generally recommend that retirees withdraw no more than 4 percent to 5 percent of the value of their investment portfolio.

Weydert and Brinkman said Bennett's strategy was close to this rule.

However, both underscored that retirees could outspend their assets following this practice if equity represented more than half their wealth or if they overestimated home values.

Munnell predicted that younger baby boomers might be forced to depend on home equity more than retirees do today, because Social Security and other sources of benefits are likely to diminish.

Reverse mortgages

Ten to 20 years from now, reverse mortgages might increase in popularity as younger boomers embrace new ways of affording retirement, Munnell predicted.

Reverse mortgages, like home-equity loans, are based upon equity, but unlike equity loans require no payback until a borrower moves or dies. Currently, only a small portion of seniors have reverse mortgages.

Marilyn Kennedy Melia is a freelance writer for the Chicago Tribune.

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