The Retirement Lies We Tell Ourselves, Pt. 2

The Wall Street Journal recently published a lengthy article on the retirement lies we tell ourselves. I’m posting these over time so that you have a chance to read this in shorter snippets. I have heard all of these (and more!) from clients. The home as a safety net requires either a reverse mortgage that is costly and has limited loan amounts or a sale of the home and a move to a less costly locale. It’s likely that neither of these will be an option that most people will want when they retire. Will you want to move away from the community you know? What if your children and grandchildren live nearby, do you want to move away from them?

Here is the 2nd Retirement Lie We Tell Ourselves:

“My home is my safety net.” To listen to many people in the 50-plus crowd, they have little to worry about when it comes to financing their retirement. That’s because they can always turn to the equity in their homes. A recent study by Spectrem Group, a consulting firm in Chicago, found that almost two-thirds of affluent baby boomers (with investable assets of at least $500,000) intend to finance their retirement by selling their homes. That should come as no surprise; housing prices in many locales have skyrocketed in recent years. (The median value of the primary residence among Americans age 55 to 64 rose to $200,000 in 2004 from $139,000 in 2001, according to the Federal Reserve.) The home-as-piggy-bank strategy, though, may not be as easy or attractive as it first appears. Most people have two options: trade down to a smaller, less-expensive home, or borrow against their equity. The first option, in theory, will result in lower annual expenses and a nice addition to your nest egg (if you walk away with a profit). Most Americans, though, wish to remain in their homes and communities as they age. Selling might sound good today, if you’re several years from retirement. But when the time comes, will you actually want to pack up and move? And will you be able to adjust to a smaller residence? Borrowing against your home, meanwhile, could be tricky. If interest rates rise in coming years, the value of your property could fall, meaning you may not be able to pull as much money from your home as you wish. Reverse mortgages are attracting more borrowers, but fees are high, and many loans are capped. (Depending on your age and where you live, a $300,000 home might yield $115,000). REALITY CHECK: “A home is not a panacea for shortfalls in retirement savings,” says Andrew Eschtruth, an associate director at the Center for Retirement Research at Boston College. At best, “you can tap only a portion of your equity,” he says. If you decide to trade down, the sooner the better. Given that many retirements today will last 20 years or more, it’s never too early to reduce expenses and shore up savings. If you plan to apply for a reverse mortgage, think of those funds as a last resort — to help pay for medical bills or long-term care — and not as money for groceries or vacations.