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Home of the Retirement Geeks

July 28, 2009

Viewing Your Home as Part of Your Retirement Portfolio

Many of today's baby boomers are looking to capitalize on home equity to enhance their retirement savings. Popular strategies include downsizing to a smaller residence, relocating to an area where the cost of living is more affordable, and taking out a reverse mortgage. Regardless of which strategy you choose, understand that relying too much on your house to fund your retirement could work against you when the real estate market cools, as it has in recent years.

Making a Move

Selling your existing home and relocating to a more affordable residence may be a reasonable option if you have considerable home equity and the shift won't negatively affect your lifestyle. As part of your research, remember to investigate the overall housing costs within your desired area. Real estate values typically vary considerably by locale, even within the same state. Finally, when selling your home, consider that the first $250,000 in capital gains ($500,000 if you sell jointly with a spouse) is not subject to federal taxation if you have lived in the house for two years or more.

A Reverse Mortgage: Do Your Homework Before Committing

Tapping home equity doesn't necessarily require relocating. A reverse mortgage may be a solution if you have significant home equity and a desire to stay in your existing home. With a reverse mortgage, you receive a source of income by borrowing against your home's equity. Payouts are tax free and may be taken as a lump sum, a line of credit, or an annuity-like payment schedule.

To qualify, you must be at least 62 years of age. You must own your home outright, or be able to retire an existing mortgage with the proceeds from the reverse mortgage. As long as the reverse mortgage is in effect, you are responsible for maintaining your home, and for paying taxes and insurance. The loan plus accrued interest is due when you die or sell the house.

However, when evaluating whether a reverse mortgage is right for you, be aware of a number of caveats. First, be sure to consider the fees, which may be substantial. Also keep in mind that the amount you owe tends to grow over time, as interest accrues on amounts that are gradually paid out. Should you live in a home with a reverse mortgage for a considerable period of time, your heirs may be left with little or no home equity at the time of your death.

Beware the Sales Pitch

Lastly, be sure to beware the sales pitch. There are a growing number of firms who are heavily publicizing the advantages of reverse mortgages with splashy TV commercials and advertisements in magazines targeted to seniors.

Reverse mortgages are not for everyone, and they are not as simple as those pitches make them sound. They are highly technical transactions and require a high level of understanding and sophistication. You must conduct appropriate due diligence prior to trusting anyone with this transaction. Reverse mortgages are not securities and are not regulated as such. Additionally, you should never consider using the proceeds from selling your real estate to purchase securities and should be wary of those who suggest doing so. Marketing information sometimes can be misleading. Remember, an offer that sounds too good to be true probably is.

Before making any major decisions regarding your home and your finances, it is advisable to consult with a real estate professional and your investment advisor to help determine the best strategies to allow you to pursue your personal and financial goals during retirement.


This article is not intended to provide specific investment or tax advice for any individual. Consult me, your financial advisor, or your tax advisor if you have any questions.


Securities, fee-based, and advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/ SIPC, America's No. 1 independent broker / dealer.* Trust services offered through The Private Trust Company N.A., an affiliate of LPL Financial. *Based on total revenues, as reported by Financial Planning magazine, June 1996-2019.

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