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Nearly everyone who came of age in the past two generations knew one thing about money: If you own a home, your “equity” is your nest egg. The underlying meaning is that if you haven’t saved enough for retirement, you can cash in your equity. Yet is that a good idea?
In recent years, home equity has emerged as a potent store of value for millions of Americans who were unable to save enough in their 401(k)-style plans. Keep in mind that “defined contribution” plans, which also include 403(b)s and 457 programs, were never designed to be pension plans. Payments are not guaranteed at retirement or adjusted for inflation. Employers are not required to contribute or even offer them. Nearly half of the U.S. workforce doesn’t even have access to them.
Something interesting, though, happened in recent years. While the world was recovering from the pandemic, home values soared. Older homeowners were reluctant to sell and builders moved away from building living-wage housing.
While millions were feeling more confident about their retirement prospects, it was often because their home values increased. That could explain why the Center for Retirement Research’s (CRRC) recent National Retirement Risk Index improved substantially, dropping from 47% in 2019 to 39% in 2022. (the lower the percentage, the higher the overall retirement confidence measured)
“Between 2019 and 2022,” the CRRC found, “U.S. home prices increased by about 22% in real terms. For context, home prices grew by 27% between 2001 and 2004. Home prices have a significant impact because households are assumed to access their home equity at retirement by taking out a reverse mortgage. The higher the home value, the more equity households can extract through a reverse mortgage.”
Still, the main issue isn’t whether you should tap your home equity if you have years to plan for a comfortable retirement. If that’s the main — or only — source of personal capital during retirement, you may have little choice. There are other considerations rarely discussed in retirement planning.
Let’s say you’re facing six-figure bills for assisted living or memory care. If you need to access home equity through a reverse mortgage, think about it carefully. Unless you sell your home to access equity, all other routes are through loans. Saving more today is often a better option if you have the luxury of time.
Save More Today
If you’re still decades away from retirement, run some numbers to see how you can save more. Make it automatic if your employer offers a feature to “robo-save” from your paycheck and increase your contributions if you get a raise.
You may not be that far off from boosting your savings to reach your retirement goals. In its “How America Saves” report, the Vanguard Group noted “participants need to reach a total saving rate of 12% to 15% or more to meet their retirement goals…we’re not quite there yet. The good news is that about 20% of participants are within 1% to 3% of their target saving rate, so minor behavioral adjustments could benefit many of them.”
There are a host of free retirement calculators online. You can set up savings plans on your own through any mutual fund company. Stay away from brokers, agents and financial “consultants” who charge commissions or layer on additional fees.
Find out what your “sweet spot” savings rate is based on your current/projected lifestyle and expected Social Security payments. After you run the numbers, it’s a matter of pure math and consistent discipline.
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