Is home valid nest egg?

Your Money

June 10, 2007|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

When Eva Polydoris looks back on the four decades before she retired, she recalls everything that stood in the way of amassing a comfortable level of retirement savings: At first, it was the usual struggles of life, including raising three children and putting them through college.

Then came financial setbacks, such as her husband's early death, substantial medical expenses that drained savings, caring for an ill mother, Kmart stock that went bad when the company went into bankruptcy, losing a job at age 66 and not being able to find another one that paid adequately.

"Things turn out very strange in life; you never know what will happen," she said.

Still, through the emotional hardships and financial disruptions, she - like many Americans - drew comfort from her home. Over the years, she watched its value rise, and subconsciously it provided a sense that she would be fine, even if other forms of saving lagged.

Now that retirement has arrived - earlier than she expected because of the job loss - she is discovering that tapping your home's value to cover basic living expenses is easier said than done. She is starting to envision her future and wondering where cash will come from when her nest egg is locked into countertops, walls and floors that can't easily be turned into grocery money.

"I go to bed at night and think about what to do," said Polydoris, of Lake Forest, Ill.

It's a challenge most Americans face at some point because they pump so much money into homes and save too little, said Craig Copeland, researcher for the Employee Benefit Research Institute. Consequently, they encounter choices that aren't popular: living on scant income, selling their home, or getting a reverse mortgage, a transaction in which the homeowner gives up equity and fees to a lender in return for a sum of money to live on.

Aside from their homes, half of households within 10 years of retirement age have accumulated no more than $88,000 in retirement savings, according to the Congressional Research Service. That could translate into $653 a month for living expenses, if converted into an annuity.

Copeland said that younger families may face a greater challenge as they approach retirement because they have stretched so far to buy expensive homes the past few years, and drawn out equity to pay for extras.

In a recent study, Annamaria Lusardi, an associate professor of economics at Dartmouth College, noted that baby boomers could be particularly vulnerable if the housing downturn grows worse because so much of their wealth is in housing.

On the face of it, she said, baby boomers are better prepared for retirement than generations before them because they have a higher net worth. But when she subtracted housing equity, she found that the median household holds less wealth than the previous generation.

"A decline in the housing market may generate substantial losses," she said. "The behavior of this market should be watched carefully."

So far, the decline in housing has been modest. The S&P/Case-Shiller Composite Home Price Index fell 1.4 percent year over year in the last quarter - the first decline in 16 years. But some analysts believe housing prices will fall further during the next couple of years to remove a record level of unsold homes on the market.

Aside from the immediate effect on their wealth, homeowners have other reasons to be cautious about depending too heavily on housing for retirement. According to retirement saving researchers, Americans are not particularly rational about their housing wealth. There is a disconnect between how they fancy their wealth and what they actually are willing to do to use the value of their homes.

When asked in surveys to think about their financial future, "people think of their wealth in housing," said Nicola Fuchs-Schundeln, a Harvard University professor of economics. But when they are asked about accessing that wealth for retirement, most say there is zero chance they will sell their home.

"It's interesting," Fuchs-Schundeln noted, that people feel security from an asset, but also have no plan to tap it.

Many retirees also find out - as Polydoris has - that tapping the money is more complicated than they might have thought.

After all, Polydoris says she still needs a place to live. And she would like to stay close to the area where she has spent most of her life and has family and friends. Consequently, even if she sells her home, she will need to use a significant portion of the proceeds to buy a replacement residence. She has looked around enough to know it won't be cheap. A multiyear housing boom has pushed home and condo prices to still-lofty levels.

She's not sure her own home has appreciated enough to provide a nest egg large enough to cover both the cost of a new home and living expenses for the foreseeable future.

As economists debate the impact of a housing recession on the economy, the effect is personal to her.

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