How the Housing Crisis Reshaped Retirement

Beyond loss of wealth, the housing downturn has meant loss of choices and confidence in the future.

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The statistical landscape of the housing industry is bad enough: falling home values, crippling mortgage delinquencies, and very little new home construction. But beyond the numbers, financial advisers say, the impact of housing problems is also doing enormous damage to older Americans' belief in their future and the idea that their later years represent any kind of "safe haven." Meanwhile, the nation's strong migration pattern—away from colder climates toward warmer-weather areas—has been frozen in place. People are staying put.

[See 10 Ways Your Home Can Pay You Money.]

Beyond direct financial losses due to real estate, says Brian Ullmann, a financial consultant in Fresno, Calif., "the real impact has been on the psyche of clients. Even those that didn't have plans to move in the short or long term have become shaken when they look at the value of their homes and how they have plummeted over the last few years."

"The biggest change that I have seen regarding the housing market is that 10 years ago, the perception of many was that their house was their retirement plan," says John Hillis, a financial planner in San Jose, Calif. "They believed that real estate, particularly in this area, always went up at a rate greater than inflation." That's no longer the case, he notes, and people's need for financial security has grown. "In times like this, having peace of mind that no matter what happens to the economy, the house is fully paid, is very reassuring," Hillis says. "It is more important than using the money for other investment opportunities."

Security is even more important than investment gains to many clients, agrees Bill Driscoll, a financial adviser in Plymouth, Mass. "A lot of people anticipated downsizing as a way of providing one of the legs of the retirement stool, and now that's not such an obvious way of doing that," he says. "They feel like one of their options has been taken away, and they get to the point where they are afraid of making a mistake."

[See How to Help Retirees Stay in Their Homes.]

"I'm running into people who are willing to take a 1 percent return" if they can count on it being there, Driscoll says. "They just feel like they can't afford to take another hit."

Traditionally, many retirees have expected to sell their homes, downsize to a smaller residence, and perhaps relocate to a new part of the country. But what once seemed so easy and natural has become impossible for many retirees.

"For clients unable to sell their real estate on their desired time schedule, it means the retirement lifestyle they originally envisioned, such as simplifying their lives by downsizing or by selling a second home to retire to one location, is put on hold," says Greg Hammond, president of the Kelly Financial Group in Wethersfield, Conn. "In the meantime, they continue to incur housing and maintenance costs they were hoping to eliminate. This has put additional strain on their retirement plan and income."

"The real adjustments to people's retirement plans come down primarily to the relocation issue," Ullmann says. "Where some people might have had plans to move to the coast or closer to their children and grandchildren in retirement, some of those plans have been put on hold for the time being."

[See How to Make Your Home Age-Friendly.]

While many retirees paid off their mortgages long ago, they can still be exposed to financial issues because of rising home insurance, taxes, and maintenance expenses. Hammond has seen clients who live along southern Connecticut's shoreline who have had to absorb enormous property-tax increases in recent years, eroding the funds they have for other retirement expenses.

Some Connecticut towns have gotten very creative about helping such homeowners, Hammond says. "I have seen some towns allow homeowners to carry forward the property taxes as a lien against the house if they are unable to pay the taxes," he says. "When the home is sold in the future or transferred to the next generation, the town would then receive the outstanding property taxes."

Multigenerational households have soared in recent years, either because children are moving back in with parents, or aging parents are moving in with their grown children. In some cases, planners say, older parents have gotten inventive in their search for financially workable solutions to multigenerational living that also meet the lifestyle needs of both generations.

[See Borrowing From the Family Bank.]

"In a couple of cases, I have seen a single parent sell their home, either to one of their children or to a third party, and then the parent uses some of the proceeds to build an in-law suite onto the long-time family home sold to the child, or adds onto the child's current home," Hammond says. "This solution allows the parent to maintain some independence, reduce their living expenses and become part of the child's family household."

Hillis notes that the housing downturn has had a silver lining for some of his older clients. Many of these clients want to help their children have homes of their own, and the price declines in some areas have made such solutions more affordable.

In another case, he said, a client who wanted to downsize decided to sell their home, invest the proceeds in the market, and rent a new home. "They have freed up cash that they can reinvest for hopefully more positive returns, while waiting for an opportunity to purchase a downsized house at an attractive price that they really love," he says.

Twitter: @PhilMoeller