Retirement isn't for sissies. Retirees are being squeezed with fewer pension benefits, increased medical expenses, low interest rates on savings accounts and an unpredictable stock market. As a result, generating enough retirement income has become a herculean task.
Your home may just be the answer. If you have a home with some equity, you may be able to use it to boost your retirement income. Even if you have enough in savings and Social Security to fund retirement, it never hurts to diversify income streams. Here are five options for using your home to generate retirement income:
1. Sell and downsize. Many retirees use a paid-off home to boost retirement income, often while moving to a more affordable location. As the housing market picks up, now may be an ideal time to sell your home and downsize to a more affordable, lower-maintenance property.
Pros: Attractive downsized options are becoming more available as more Americans seek to downsize. In 2010, CNBC noted that the new concept home from Builder magazine was only 1,700 square feet. This trend means that finding a downsized, affordable new home is easier than ever.
Cons: While the housing market is turning around, you may still not get as much out of your current home as you had hoped. Plus, as CNBC pointed out, downsizing doesn’t automatically mean you’ll save money.
2. Rent it out. Dreaming of traveling the world during retirement, but don’t have enough cash to make it happen? Consider renting your home while you travel. This solution generates steady income (as long as the property stays rented) and allows you to keep your home for when you’re ready to settle down again.
Pros: If you rent out your home, you don’t need to worry about selling it, and you can wait until later, when prices may rise even higher. Plus, as long as you have a good renter in your home, you can count on a steady monthly income.
Cons: Becoming a landlord isn’t for everyone, and it can be quite a hassle. Be sure to do your research before you decide to rent out your home.
3. Tap into your equity. If you have plenty of equity in your home, you’ve got several options. A home equity loan, home equity line of credit or cash-out refinance could give you money to work with in retirement. Today’s low mortgage rates make these attractive options. Each of these options will have different costs and benefits, so think carefully about what you plan to do with the money and whether tapping your home’s equity will be worth your while in the long run.
Pros: Cash borrowed against your home equity can be used to pay off higher-interest debt or address pressing home maintenance concerns. Some people will also invest the money or use it to buy an annuity, which can be a good idea if your returns are greater than the interest you pay on your new or second mortgage.
Cons: Obviously, any of these scenarios has you borrowing against the value of your home. If you can’t make the payments in the future, you could lose your home. And if you invest the money, you aren’t guaranteed that your rate of return will beat the interest rate you’re paying on the mortgage.
4. Get a live-in renter. Those empty bedrooms that once belonged to your children can be depressing, or they could become a source of steady retirement income. Consider renting out extra rooms, or even turning part of your home into a separate rental apartment. The rent generated could go far toward boosting your retirement income.
Pros: In this situation, you don’t have to give up your home or travel. You just need to find a reliable renter to live in your home and write you a check every month. (Renting is a little more complicated than that, of course, but it can definitely be a good thing.)
Cons: Being a landlord is tough, and inviting people into your home – whether they’re in a separate apartment or not – can be risky. Plus, converting your current home into an income property may be time-consuming and expensive.
5. Consider a reverse mortgage. A reverse mortgage gives retirees access to their home equity without having to make payments each month. You can tap your equity through a loan that you withdraw in a lump sum, in monthly payments or as a revolving line of credit. The difference between a reverse mortgage and a home equity loan is that the loan is payable upon death.
Pros: A reverse mortgage is often used as a retirement income “Hail Mary” for those with few options left, and it’s a lower-risk way to tap into your home’s equity.
Cons: Reverse-mortgage scandals abound, so you need to be careful who you deal with when taking one out. Also, the fees associated with a reverse mortgage can be onerous.
Rob Berger is the founder of the popular personal finance blog, the Dough Roller.
Corrected on 08/09/13: A previous version of this story misstated that reverse mortgage lenders could have a claim on the estate. Reverse mortgages are non-recourse loans.