Smart Ways to Access Your Housing Wealth

Once a last resort, home equity can be an active retirement tool to fund current needs.

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Using the equity in your home as a long-term tool to enhance your retirement is a common goal. Doing so wisely is the focus of an uncommonly sound report by MetLife's Mature Market Institute. Tapping Home Equity in Retirement is well worth the hour or so it would take to read and ponder its suggestions. Even with big drops in home values, the declines in retirement accounts and traditional pensions have made home equity an even more important asset for many people as they approach retirement. Here's a highlight reel:

Strengthen Security. Retirement income used to be described as a three-legged stool based on savings, private pensions and Social Security. But the report notes that pensions and the savings rate have both declined, leading to more active use of housing wealth as a source of retirement security. Tools include expanded use of reverse mortgages and home equity lines of credit, with loan proceeds often used to enhance longer-term financial security. "Home equity can play an important role to strengthen the capacity of older homeowners to cope with financial uncertainties in later life," the report says. It emphasizes that these decisions should be carefully studied and that tapping home equity at earlier ages may make many homeowners particularly vulnerable to financial pressures later in their lives. [See Is a Reverse Mortgage Right for You?]

Seek Flexibility. The report notes that accessing home equity to help fund normal consumption goes against conventional wisdom but that older homeowners are doing so more often in order to fund long-term care and other health needs. "As an alternative to using home equity for regular consumption," the report says, "older adults may want to improve their retirement security by preserving this asset as a cushion against unexpected events." It adds that improved health and enhanced services that help seniors stay in their homes have reduced the likelihood of needing to enter a nursing home. However, they've raised the importance of having access to funds that will pay for preventive health and home-improvement needs. "Having a cushion of readily accessible funds can encourage older homeowners to act sooner, to keep small problems from becoming a costly crisis," it says.

Think Goals, Not Products. Asking whether a reverse mortgage or a home equity line of credit is right for you may be a good second step. But the best first step is to develop a set of goals or objectives that can be realized by using the equity in your home. Then, you can review which available product is the right one to help achieve your goals. One interesting example involves delaying Social Security from age 62 to 70. Doing so will boost your annual payment by eight to nine percent a year PLUS the rate of inflation. And that boost will be reflected in payments that you will receive your entire life. Viewed this way, tapping home equity might be a great idea to help fund daily living expenses and defer Social Security.

The report used the example of a 62-year old woman with a $150,000 home who earns $50,000 a year. If she started receiving Social Security at 62, her monthly benefit would be $1,013 but if she waited until age 70, it would increase by $940 a month to $1,953. If she stopped working and took out a reverse mortgage to produce the $1,013 monthly income she would have received from Social Security, she would have exhausted a big chunk of her home equity during the eight years she was waiting to reach age 70. However, the report says, if she took a part-time job and pulled only $500 a month out of her home, she could still retain a solid amount of home equity. Or, she could continue working full-time until age 66 and then switch to part-time work and use a reverse mortgage to draw $500 a month for four years, with a minimal impact on her home equity. The report cautions that reverse-mortgage fees can be steep and these and other loan costs should be carefully considered. There is a Social Security benefits estimator that will allow you to see the impacts of various delays in taking Social Security payments.

[See also Four Signs You're in Retirement Denial.]