Real Estate Journal: Don’t Count on Home Equity as Retirement Income

Marketwatch’s Amy Hoak reports at the Real Estate Journal:

A recent Securities Industry Association retirement study identified a "wealth effect" that surfaced as homeowners amassed equity in their properties and perceived they had less of a need to save. Factors such as rising interest payments and higher energy prices also pushed Americans to slack off when it came to lining their retirement nest egg, the study concluded.

For many American homeowners, nearly half of their net worth is based on the value of their home, the study found. At the same time, the number and percentage of households holding a retirement account such a 401(k) or an individual retirement account have fallen since 2001, and nearly half of American households are not saving at all.

The study also estimated that half of the next wave of retirees — the baby boomers — will be unable to maintain their standard of living in retirement, even if they postpone it.

Hoak goes on to talk to lots of financial experts who agree that having a ton of home equity is not a replacement for retirement savings, for a lot of reasons. I couldn’t agree more. I have watched first-hand as public sentiment has shifted from the idea of a home as primarily shelter (with the possibility of appreciation), to an all-out outlook of a home as a “liquid-like” asset.

This is mainly due to the incredible appreciation that people have seen in their homes over this past “boom” period, and the ease with which homeowners have been able to take equity out of their homes.

In New York, where so many people rent, I think there’s also a little voice in a lot of people’s heads that says selling the place, keeping the cash, and renting again one day would be OK, too.  But don’t forget–a fat New York rent is one of the best ways imaginable to eat through that retirement nest egg.
A primary home purchase serves a multitude of purposes and none more important than the roof over your head. Other obvious benefits are the tax relief that ownership provides and the likelihood that if you are long in any housing market, your home will appreciate. That said, don’t expect the insane appreciation that we have seen over the past decade, and don’t forget that even when you retire, you’re still going to want a roof over your head. The experts quoted in this article make the point that the best way to use your home equity in your retirement is to have your home paid off entirely–and to live cheaply without mortgage payments at all.

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