Why Your Home Isn't Your Retirement Plan

There's a comforting story a lot of people tell themselves as they make mortgage payments year after year: "I'm building equity. When I retire, I'll sell the house, downsize to something smaller, and live off the difference." It's a reasonable-sounding plan, and it's one that financial advisors and family members have repeated for decades. The house becomes a piggy bank you crack open at 65, and everything works out.

If this is part of your retirement thinking, you're in good company. The Federal Reserve's Survey of Consumer Finances shows that home equity is the single largest asset for most American households, often representing more than half of their total net worth. For people without pensions or substantial 401(k) balances, the house isn't just where they live; it's the entire foundation of their retirement security. The trouble is that most people don't try to access that equity until they actually need it, and that's when they discover how hard it is to turn a house into cash you can spend.

The most common version of the plan involves selling the family home and buying something smaller. You pocket the difference and use it to fund your retirement years. But the math has changed in ways that make this harder than it used to be. The same forces that drove up the value of your home have also driven up the value of the smaller places you'd move into. A couple in their sixties who bought a four-bedroom house in Austin in 1995 for $180,000 might find it's now worth $650,000, which sounds like a windfall until they start looking at two-bedroom condos in the same area and realize those are selling for $400,000 or more. The gap between the big house and the small one has shrunk dramatically, and after you pay realtor commissions, closing costs, and moving expenses, the amount you actually pocket can be far less than you imagined.

Then there's the question of where you'd go. Downsizing often means leaving the neighborhood you've lived in for decades, the community you know, the doctors and grocery stores and friends who make up your daily life. Some people make that move gladly. Others find the prospect so painful that they stay in a house that's too big for them, paying property taxes and maintenance costs on space they don't use, because the alternative feels like giving up their entire world. The equity sits there, technically accessible but practically frozen.

For those who want to stay in their homes, the options for accessing equity aren't great. A home equity line of credit requires monthly payments, which doesn't help someone on a fixed income. A reverse mortgage lets you tap equity without monthly payments, but the terms are complicated, the fees are substantial, and the loan balance grows over time as interest accrues. Many people who take out reverse mortgages find that by the time they die or need to move to assisted living, there's little equity left for their heirs or for their own care needs. The money that was supposed to fund retirement has been eaten by interest charges and origination fees.

And then there's the scenario nobody wants to think about: what happens when you need long-term care. A few years in a nursing home can cost $300,000 or more, and Medicare doesn't cover custodial care. Medicaid does, but only after you've exhausted most of your assets, including, in many cases, the equity in your home. The house you planned to sell for retirement income may end up going to pay for the care you need at the end of your life, leaving nothing for the retirement you imagined or the inheritance you hoped to pass on.

The "house as retirement plan" story has always been more comforting than accurate, but recognizing its limits is actually useful because it lets you plan around them while you still have time.

If you're counting on home equity for retirement, start running the real numbers now rather than assuming it will work out. Look at what smaller homes actually cost in the areas where you'd want to live. Factor in transaction costs, which typically run 8 to 10 percent of the sale price when you include commissions, closing costs, and moving expenses. Think about whether you'd actually be willing to leave your community, and if not, what it would really cost to stay.

If the numbers don't work the way you hoped, you have time to adjust. That might mean saving more in other accounts, working longer than you planned, or reconsidering what retirement looks like for you. None of those options are as appealing as the piggy bank story, but they're grounded in how things actually work rather than how we wish they did.

Your home can be part of your retirement security, and for many families it will be an important part, but building a plan that depends entirely on selling the house is a plan that depends on a lot of things going right at exactly the moment when you have the least flexibility to adapt if they don't.

Citations

• Consumer Financial Protection Bureau, research on reverse mortgage outcomes.
• Federal Reserve, Survey of Consumer Finances, data on household wealth composition.
• Genworth, Cost of Care Survey, data on long-term care expenses.
• National Association of Realtors, data on transaction costs and home price trends.