One of the best things about owning your own home is that, simply by buying it, you are investing in your future. Unlike renting, every time you make a payment on your mortgage, you are building more equity and own more of your home.
This makes homeownership a potentially important element of retirement planning. With Social Security in some hot water and people living longer, the need to save up for your post-retirement life is paramount. This is on top of a troubling new finding by the Employee Benefit Research Institute that claims that the Baby Boomer generation and their children remain “woefully unprepared for retirement.”
A leg up in retirement
Going into their golden years, many Americans struggle to build up a sufficient reserve of funds. By being able to turn the equity in your home into cash you can live on if you need it, homeowners have a serious leg up when it comes to retirement savings.
“That is really going to improve a retiree’s cash flow, especially for people relying on withdrawals from their savings because they don’t have a pension,” Jamie Hopkins, co-director of the retirement income program at the American College of Financial Services, told Bankrate.
Consider income and expenses
While home equity is a commonly-used tool to ensure you have funds after retirement, it is not a decision that should be made lightly. If improperly managed, you could end up losing your home. Before you leverage your equity, it is key that you take a broader look at your finances and calculate the value of everything you own and any pensions, annuities and other sources of income you will be receiving.
After that, consider your potential expenses, both in terms of necessity and luxury. Many cite a rule of thumb that you’ll spend 80 percent of your current income in retirement, but the truth is that you are likely to spend nearly as much retired as you did working. Just because you’ve retired doesn’t mean that you shouldn’t still be saving for a rainy day. Keep in mind that certain expenses, like medical bills, may even be greater in your post-retirement years than while you were working. You may also want to travel in your spare time or gift your children or grandchildren cash for holidays or special occasions.
Once you have a sense of both income and expenses, compare the two amounts. If you see a gap, the equity in your home may be a useful, if not necessary, element of your income after you stop working.