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Your Home Equity: How to Use It for Retirement Security

Recent reports from the Center for Retirement Research at Boston College and the Society of Actuaries show that the majority of Americans approaching retirement have more wealth in their home's equity than in their 401k fund and other retirement savings. What I wonder is, when aging boomers start realizing their 401k balances aren't sufficient to fund their retirement, will they consider tapping their home equity as a source of retirement income?

"No" might be the answer you'd conclude based on a recent news release from the Society of Actuaries. It issued a report that found that only 16 percent of current retirees have tapped home equity to finance their retirement, and only 20 percent of pre-retirees were considering this course of action.

Of the few people who reported using their home equity to finance their retirement, the most preferred method of funding was to sell their home and use the proceeds to generate retirement income. Here are the stats:

  • 45 percent sold their home
  • 20 percent took a home equity loan
  • 12 percent bought a reverse mortgage
The report also found that 77 percent of current retirees and 80 percent of pre-retirees have or plan to completely pay off their mortgage as a way to manage their living expenses in retirement.

I'm encouraged by these results. I believe that paying off your mortgage is a great way to manage your living expenses and have financial and emotional security in retirement. I also think it's a good idea to consider downsizing your home, and, if you realize a profit in the process, invest the proceeds to generate retirement income. And I'd much rather see people avoid the temptation to tap their home equity through reverse mortgages or home equity loans until they're really desperate -- either to pay for long-term care expenses or when they actually run out of money.

If you follow this advice -- to avoid tapping your home's equity reserves until it's completely necessary -- but your 401k balances aren't sufficient to generate the retirement income you need, then working longer might be your best solution. But consider how you can improve your life either by finding different work you really like, or by reducing your hours. It would be unfortunate if you retired while you could still work, tapped your home equity through a reverse mortgage, and then later couldn't pay your bills due to poor health or long-term care expenses.

Aging boomers will need to make every dollar count in their retirement, and will really need to make smart decisions about deploying their home equity. Fortunately, it looks like many Americans are already doing just that.

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