People
over 65 average $150,000 in home equity, according to the Center for Retirement
Research at Boston College. That amount dwarfs the rest of their assets
combined. This generation of retirees is facing the decline
of traditional pensions, while the 401(k)s that replace them are less generous
and more uncertain.
So the case for employing one's home as a
source of retirement income has never been stronger. There are three major
paths to do that, depending on what your priorities are and the details of your
current situation.
This is
the simplest way to go. The Center for Retirement Research notes that there are
a lot of advantages to choosing a home now that will allow you to age safely
and happily in place. For example, you can move from a large empty nest to a
single-story unit with modern, accessible updates like grab bars in the
bathroom. Pick a townhouse in a development with a gym and swimming pool so you
can exercise daily. Gravitate toward a walkable neighborhood. Or move closer to
adult children and grandkids -- maybe all of the above! Housing costs are the
single biggest item in most retirement budgets, hovering around 30 percent, so
with a cheaper home you will save money each month. And aging homes have costly
maintenance needs that grow over time. Moving, meanwhile, definitely doesn't
get easier as you get older.
The
profit from your sale will be free from capital gains taxes up to $250,000 for
a single homeowner and $500,000 for married couples who file jointly. You can
invest the proceeds in bonds, an annuity or an index fund and draw from the
income, or you can use the cash to delay applying for Social Security.
--Consider
a reverse mortgage.
For
some people, leaving their longtime homes is just a nonstarter. Maybe you are
already lucky enough to be near family or a "naturally occurring
retirement community" full of old friends and neighbors.
Borrowers
62 and older who have home equity and need retirement income can apply for a
home equity conversion mortgage. Essentially, this is a loan against the value
of your home. You can stay in the home, spend the money now when you need it,
and nothing needs to be repaid until both you and your spouse move out or pass
away. In order for this to work, your home must be paid off or have a low
remaining balance that will zero out with the proceeds from the loan. And you
will still need to carry taxes, insurance and maintenance each month.
The
good news is that because the income is a loan, it is tax free and doesn't
affect your Medicare premiums or taxes on Social Security.
Reverse
mortgages have had a poor reputation in the past, but a Federal Housing
Authority home equity conversion mortgage is federally insured and comes with
more protections. Ignore any solicitations you may get and reach out to the
National Council on Aging at 800-510-0301 for phone-based counseling, or check
the home equity conversion mortgage pages at Hud.gov.
--Rent
out a room.
For
those who need a more flexible, short-term solution than the two big steps
above, becoming a landlord or landlady may be right for you. Maybe you can take
on a roommate who provides companionship and mutual support as well as help
with the mortgage. Or do a trade if you need household help.
Are
you an entrepreneurial type? Have you already retired to your piece of
paradise, or are you blessed to be in a great metropolis? Then you may want to
look into a platform like Airbnb, which allows you to take in guests for as
little as one night. The company says that women, who make up the majority
of their top hosts, earned an average of $6,600 last year in the U.S.
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