Home equity not a retirement solution?

[REWahoo]

A house is not a piggy bank
Forget home equity as retirement solution -- except when it's the only solution

CHICAGO (MarketWatch) -- The equity you build up in your home is not a retirement-savings account, although many Americans are tempted to think that it is. But the smartest way to think about home equity, financial planners say, is as a cushion, a spare tire in reserve just in case savings calculations are off or liquid assets run out.

"It's a place to live, not a brokerage account," said Sherman L. Doll, a personal financial specialist with Capital Performance Advisors in Walnut Creek, Calif. "But try to convince a Californian of that."

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Some retirees planning on downsizing may also be surprised when the smaller home they seek out isn't significantly cheaper than their current one, said Brett A. Coffman, a financial planner with Matrix Wealth Advisors Inc., in Charlotte, N.C. A lot of construction around the country is catering to baby boomers nearing or entering retirement, and the new buildings often add features to cater to retirees' needs, which can make the homes more expensive.

"A retiree who thinks that he can trade his 4,000-square-foot home in for a new 2,000-square-foot town home and pay only half what his (current) home is worth may be very surprised," he said.

 

[Leonidas]

A house is not a piggy bank

"A retiree who thinks that he can trade his 4,000-square-foot home in for a new 2,000-square-foot town home and pay only half what his (current) home is worth may be very surprised," he said. [/i]

Damn, there goes my brilliant plan.

Around here the housing market has just started doing well, but I have been toying with the idea of looking at some other areas just to see if a certain locale screams for me to live there and offers some bargains.

 

[Arif]

CHICAGO (MarketWatch) -- The equity you build up in your home is not a retirement-savings account, although many Americans are tempted to think that it is. But the smartest way to think about home equity, financial planners say, is as a cushion, a spare tire in reserve just in case savings calculations are off or liquid assets run out.

Is that because they can't make a commission off the equity in your house? Hmmm...don't rely on your equity, instead invest the money with us so we get our cut. I don't think their is anything wrong with using your home equity as an investment. Sure it may go down, name me one investment that won't? While it obviously shouldn't be your only savings for some it is a large portion of it.

 

[kcowan]

Worked for us. Downsized and rented in 1997. Living off the investments. So far up 15% in assets after paying rent and living costs.

 

[cute fuzzy bunny]

Yep, downsizing definitely threw a little more in my kitty. Sold 2800 square feet for a half mil and bought 1800+ square feet for $250k just 40 miles away. And that was a california to california move.

So much for that declaration.

But I wouldnt use my home equity line of credit for anything other than a very short term (couple of days) backstop or during exceptional financial duress. When we bought my wifes car I used it for a day until some money market shares finished transferring. I think it cost me about four bucks in interest to do it.

 

[spideyrdpd]

You could buy a cheap place in century village
I agree with the general statement though . You home isnt an asset
Kidding . The truth is I know people with the 500k homes that are paid off that they wont sell. Then there is the fact that picking up and moving does come with some costs. So sure you sell the home and maybe you get 250k which is a nice addition to the retirement but you need to have a lot more than that.
Of course it does have a lot to do with where you move to . There are areas here with the 300k townhomes. I am not sure what the luxury is. Then there are the apartments with the beach view that go for 400k for a one bedroom. Heck I moved out of the bronx to get out of the projects.
Different strokes I guess

 

[Scrooge]

I tend to view primary residences the same way I view other investments that could potentially take quite a bit of time to liquidate. It's a gamble and I generally don't gamble, but the difference in this case is that the alternative, i.e. not buying a place to live, is a gamble as well. You can't live in TIPS 

Just like in the case of "coming inheritance", I wouldn't count on the current market value of your primary residence (minus selling/moving expenses) until you had that money in the bank.

 

[TromboneAl]

I figure downsizing or a reverse mortgage as my backup or failsafe.

 

[mickeyd]

Years ago when I began to think about what all of my assets were worth, I decided that I would not count the value of my house, it's contents, nor my 2 vehiles as part of my assets. I have kept that up and believe that it is the right thing to do for us. Others feel that they should include the value of their residence as part of their assets, ok good deal.

My house, even though paid off, is really a money pit what with utilities, insurance, property taves, upgraged kitchen, bathroom etc. If I did not own a home I would have few expenses at all. Of course I'd be a homeless person or living in a shelter, however my expenses would be low, low.

Twenty years ago the percentage value of my home was a good deal larger than it is now, so my other investments have increased more than my home has and I still have a nice place to go to at night.

 

[WRBT]

So say you own a paid off home worth $300k, and you also have $300k worth of investments. How does that impact your investment mix? Do you start off counting your portfolio as being 50% (relatively) low volatility asset class?

 

[cute fuzzy bunny]

Do you start off counting your portfolio as being 50% (relatively) low volatility asset class?

I consider my paid off home as part of my asset mix. It can be converted into about $350k in cash in a few weeks or so by HELOC or sale, or converted into a $1200-1400 a month income producer by renting.

I dont think I need a buttload of bonds to reduce my portfolio volatility when I have no mortgage or other debt payments. Why do I care about volatility when I dont have any significant monthly bills?

The portion of the 'mortgage/no mortgage' decision that seems to escape some folks. They'll keep a mortgage while holding bonds paying about the same or less, and keep more bonds because they cant afford a lot of volatility screwing up their mortgage payment.

Create a problem, then create a construction to solve the problem you made. I think i'll just not create the problem in the first place.

 

[LEX]

This is a brilliant insight.  I can not take personal credit for it since it was derived from other discussions I was privy to, but I thought it was worth sharing.

Social scientists should develop a test to determine an individuals or families QLQ-Quality of Lifestyle Quotion. This test would be similar on a point scale to an IQ test. With all the talk about maintaining ones lifestyle, I think now is the time to quantify the quality of lifestyle one actually has, in order to compare each other on a relative basis.

Some factors that will be used to determine ones QLQ would include such questions as;

1) How many hours a day do you spend driving to and from work. hours? 0 points.

2)How many man hours of work must you or your family put in, in order to maintain your lifestyle? 100? 0 points

3)What percentage of your net income does you or your family spend to keep a roof over your head? 100% 0 points.

You get the Idea. When one says their quality of lifestyle is so much better because they live in a Mc Mansion, or has lots of toys that they actually own, lets give them a test to see if what they are saying is really true. They could be in debt over their heads, working mega hours at their jobs to pay their bills, and spending countless hours driving to and from work. Not a very good quality of lifestyle if you ask me. But how do we actually know, if we don’t quantify this. A score of less than 100 would qualify you as a moron. A score of less than 80 would qualify you as an idiot. A score of greater than 160 would qualify you as a genus. In quality of lifestyle terms, of course.

 

[Texas Proud]

Lex...

The problem is that the test is meaningless... I used to work in an area where most of the people were workaholics.. if they were not putting in 80 hours a week they felt like they were useless... they used to get on me because I wanted to leave around 6 PM..

One of the guys kept working as his wife died of cancer!!!

You might say that they do not have a high number, but they like thier live the way it is more than what you would like... can you say they are wrong Not me... I would not want to do it, but to them it is the best life they could have...

 

[LEX]

You are right. Empty vessels always seek to fill the void.

 

[Alex]

Yeah, don't count on your lousy home equity, Put your money in "OUR" loaded mutual funds instead! : another BS article - more financial porn IMHO

 

[macdaddy]

I think sometimes it's okay to count home equity in a retirement plan. My uncle lives in California and his house is worth $850k. He is divorced and has three kids and earns maybe 50k a year with overtime. No 401k or money invested. I helped him come up with a retirement plan, which is to work until 65 (when the last kid leaves school), sell the house, move somewhere a lot cheaper (location tbd) and spend 50% to buy a smaller house in full. The other 50% which should be about 400k in today's dollars will be invested in the retirement fund to supplement social security. Would he like to stay in his 4 bedroom 3 bath house in California? Yeah he would. But he knows it's not an option and he will be happy to settle for a 3/2 somewhere in Arizona. In his neighborhood there are a lot of people in the same situation, so my only concern is that they all run for the exits at the same time, and flood the market.

 

[Scrooge]

I think sometimes it's okay to count home equity in a retirement plan.  My uncle lives in California and his house is worth $850k.  He is divorced and has three kids and earns maybe 50k a year with overtime.  No 401k or money invested.  I helped him come up with a retirement plan, which is to work until 65 (when the last kid leaves school), sell the house, move somewhere a lot cheaper (location tbd) and spend 50% to buy a smaller house in full.  The other 50% which should be about 400k in today's dollars will be invested in the retirement fund to supplement social security.

I would feel rather uncomfortable if my house accounted for 100% of my retirement portfolio. What if he turns 64 and the market drops 25%? Does he sell anyway and end up with 200k in the bank instead of 400k? Does he try to ride it out by taking a home equity loan? Either option would be dicey IMHO.

 

[dumpster56]

sold my 513,000 dollar house took 300,000 in profit and bought a home for 335,000.

A very small mortgage and will pay it off in less than 5 years.

It seems to have worked out pretty good.

 

[califdreamer]

I suppose home equity CAN be a retirement solution depending on the situation. I'm a single guy in a 4BR/3BA house with a three car garage in San Diego. I originally got on this board by asking "Should I cash out of the house?" Have gone through much mental you-know-what considering ways to use the home equity to ER now. I decided against selling and renting (the arbitrage thing) or selling and downsizing in the same area (after costs of selling, etc. I can't see that you gain much). I've spent considerable time thinking about relocating to a less expensive area and buying a smaller house for cash. I've sort of decided to stay put and work about three more years and ER in place.

 

[dumpster56]

I suppose home equity CAN be a retirement solution depending on the situation. I'm a single guy in a 4BR/3BA house with a three car garage in San Diego. I originally got on this board by asking "Should I cash out of the house?" Have gone through much mental you-know-what considering ways to use the home equity to ER now. I decided against selling and renting (the arbitrage thing) or selling and downsizing in the same area (after costs of selling, etc. I can't see that you gain much). I've spent considerable time thinking about relocating to a less expensive area and buying a smaller house for cash. I've sort of decided to stay put and work about three more years and ER in place.

Calif

I moved and kinda think I might rent a share in NYC and work two more years. My wife is sooo happy being back in her homestate near her sister and a small mortgage.

Being a short time worker and knowing that staying 2 more years gives me 700 more a month well it might be worth doing.

 

[ESRBob]

I think people ERing and selling the home now are probably still in good shape (last year would have been ideal!) But a side of me wonders if this supposedly brilliant idea will stay briliiand ten years from now once 50 milloni babyboomers are all trying to sell their mcmansions at once to 35 million GenXers... the idea is good, but the price may not stay up there. We've gone through long periods of sagging real estate prices in this country, especially for larger homes, and it could happen again.

 

[2B]

My inlaws home is saving my butt. They have very little but their house is worth $500K+. They are both in long term care and this turns out to be how its going to be paid for. It was probably the only decent investment he ever made.

 

[Rich_by_the_Bay]

My inlaws home is saving my butt. They have very little but their house is worth $500K+. They are both in long term care and this turns out to be how its going to be paid for. It was probably the only decent investment he ever made.

Yeah, but it's not their home anymore -- the nursing home is, and now the house is just an asset. Unfortunate circumstances, but...

That kind of supports my view: your home is an asset (for FIRE planning purpose as opposed to estate planning) for just a few transient periods in live, such as moving, nursing home, collateral for HELOC, etc. The rest of the time, since you have to live somewhere, it's a lifestyle choice which simply reflects your priorities as to how much of your money you want to spend on what.

 

[cute fuzzy bunny]

Eh, I can live in an apartment or in my in-laws rv and sell my house.

Its always an asset. Just not a primary one.

 

[donheff]

That kind of supports my view: your home is an asset (for FIRE planning purpose as opposed to estate planning) for just a few transient periods in live, such as moving, nursing home, collateral for HELOC, etc. The rest of the time, since you have to live somewhere, it's a lifestyle choice which simply reflects your priorities as to how much of your money you want to spend on what.

I am planning to keep my house for the duration and pass it on to the kids. But, in a pinch, a lived in house can help out with retirement. My FIL comes from a line of heart attack victims. He thought he would never see 70 and planned accordingly. At 80, his nest egg is pretty much tapped out. DW helped him arrange a reverse mortgage five years ago and he is doing fine.