When Your Retirement Security Hinges on Selling Your Home

For many households, the home is their biggest asset — and for some, it is also central to retirement planning.

Older Americans and Baby Boomers hold about $13.8 trillion in housing wealth, according to Realtor.com. For some, that means selling a home to turn equity into cash and support retirement. Others may need to rely on home equity as a source of income in later life. Here’s how to handle a retirement plan that depends heavily on your house.

Why the home becomes part of retirement planning

Home values have risen sharply over the years, and in some cases people have more wealth tied up in their houses than in their retirement accounts. Retirees can use home equity to help pay for expenses, but that works very differently from taking money out of a 401(k).

Drawing on home equity lowers your ownership stake and usually adds interest costs. It also means borrowing against the property, which requires taking out a loan and can take several weeks to complete. Some retirees may live longer than expected and exhaust their home equity. Without a backup plan, that can force difficult choices when options are limited.

That is one reason many retirees choose to downsize. Moving from an expensive market to a smaller home in a less costly area can free up cash. For some empty nesters, having less space or a single-level home is also appealing because it reduces concerns about stairs. Downsizing can release equity without borrowing against the home.

What can go wrong when a sale is necessary

Even when a home represents significant wealth, retirees still need a buyer willing to pay the current price — and they also need to find another home at a price they can afford. A weak housing market, steep selling costs and difficulty locating and purchasing a new place can derail the plan.

Despite those realities, some homeowners are reluctant to sell. They may feel attached to the house, the neighborhood or the community around them. Staying put can make sense if the finances allow it, but some people may still need to downsize to protect their long-term security, even if they are not emotionally ready to move.

How to reduce the risk

Selling a home can create a large financial boost, but it still leaves the question of where to live next. It is important to compare how your costs would change if you moved into a smaller home, rented, or chose a senior living arrangement.

Planning this kind of move well in advance can help you avoid surprises. A financial planner can also help map out the transition and estimate the impact on your overall finances.

Some people look at other options, such as renting out part of the home or arranging multigenerational housing. Adult children may also be facing high housing costs, and living together can help lower expenses if everyone agrees. Just as important, retirement savings should not depend entirely on the house; accounts such as 401(k)s and individual retirement accounts (IRAs) can provide additional support so you are not fully reliant on home equity for a comfortable retirement.