For many people, their home is their most valuable asset. So, it’s no wonder they would want to count any built-up equity in that home as part of their retirement nest egg.

However, as we have seen in the last decade, the housing market can be up or down, which revives an age-old question: Should you consider your home to be an investment you can tap for retirement or simply another cost of living?

The answer depends on how much equity you have built up in your home—and what you expect your retirement expenses to be.

home equity and retirement

Your Home and Retirement: It Depends On Your Equity

In the past, traditional thinking was that home equity created savings for the retirement years and an inheritance to pass on.

Unfortunately, more recent trends show an inclination to spend rather than build equity, with homeowners taking out home equity lines of credit (HELOCs) during the good times of rising home values and low interest rates. Before the latest foreclosure crisis in 2007, homeowners used refinancing to pay other debt, make home improvements, and pay for vehicles, education, medical expenses, taxes, real estate, or stock market investments.

This spend out of equity resulted in millions of homeowners eventually going underwater (having negative equity) when home values dropped. More than 8.2 million homeowners entered the foreclosure process from January 2007 to December 2011, according to data by RealtyTrac.

Today, as home prices rebound all around the country, home values are increasing and so is homeowners’ equity. But while home equity is certainly an asset on the balance sheet, should it be counted as an asset in the retirement plan?

Alex Benke, CFP®, Betterment’s Director of Advice Products, takes a conservative approach to planning.

“Your retirement home is a place to live in, not a place that provides income,” he said. “If you plan to move to a smaller place, then you can consider that extra equity part of your plan, but don’t forget taxes, fees, and commissions from a sale.

Otherwise, Benke said, savers should not consider any part of the house in the plan for income, except in extreme situations where a reverse mortgage is the only option. This should not be something you plan on while you’re still saving and not yet retired.

Homeowners who have more than 50% equity in their home can safely factor those funds into a long-term retirement plan to pay for future living and care expenses, says financial advisor Rick Winters, president of Winters Financial Group in Westlake Village, Calif.

Under any circumstances, relying on home equity as a major source of net wealth can be a risky gamble—especially for older homeowners—should the market take another tumble and home prices drop sharply again.

Under any circumstances, relying on home equity as a major source of net wealth can be a risky gamble—especially for older homeowners—should the market take another tumble and home prices drop sharply again.

How to Factor Your Equity into the Big Picture

To determine how home equity should be factored into the retirement pot, many advisors will first look at a homeowner’s balance sheet.

The first step is for the homeowner to calculate his or her net worth—the value of everything owned less the cost of everything owed—and then figure out how much a comfortable retirement is going to cost. Will that be $1 million or $5 million? Then the question is: Where is it going to come from?

If a homeowner who is near retirement age has already decided to sell the home and include the proceeds in the retirement nest egg, then the cost of replacement housing has to be added into the cost of retirement.

If a homeowner near retirement does not plan to sell, then the home equity should not be included into the retirement savings calculation.

Possible Solutions: Downsizing and Refinancing

In the past, the typical homeowner’s plan has been to stay in the family home until retirement and then downsize into a smaller home or retirement community.

These days, however, that plan might benefit from a more rapid timeline. After doing the math, it may be that selling sooner and becoming a renter could provide more flexible and liquid assets that can be invested in an investment portfolio for retirement.

“It depends on how much debt they have on the property, the area they live in, how long they have lived in the house, and where are they moving to,” Winters said.

Another option for pre-retirees may be to refinance the current home and lock in a lower interest rate in order to lower the mortgage payment, thus decreasing expenses in retirement.

Both downsizing and refinancing may allow the homeowner to tap existing equity in the home and add it to the retirement fund for future expenses or investment in other opportunities.

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