Leveraging Home Equity for Retirement: Strategies for Financial Security

For many Americans, home equity represents one of the largest assets in their financial portfolio, yet it’s often underutilized or considered a last resort in retirement planning. Joe Anderson and Big Al emphasized the importance of integrating home equity into a broader retirement strategy to enhance financial security and sustain income throughout retirement. With U.S. median household wealth estimated at around $400,000—including $240,000 in home equity and $158,000 in liquid assets—it’s clear that homeownership plays a significant role in financial stability. Let’s explore how you can leverage your home’s value for a stronger retirement plan.

Downsizing as a Retirement Strategy
One of the simplest and most effective ways to access home equity is through downsizing. As life changes—children move out, health conditions make stairs more challenging, or the upkeep of a large home becomes overwhelming—downsizing can free up substantial cash while reducing monthly expenses.
Financially, downsizing can eliminate or reduce mortgage payments, lower property taxes, and cut down on maintenance costs. The average cost to maintain a home is about 1% of its market value annually, which can add up quickly. By moving to a smaller, more manageable property, you can redirect those savings into retirement investments or living expenses.

Tax Implications of Selling a Home
When selling your primary residence, there are significant tax advantages through the 121 tax exclusion. This allows single homeowners to exclude up to $250,000 of capital gains from their taxable income, while married couples can exclude up to $500,000.
To qualify, you must have owned and lived in the home for at least two of the last five years. This exclusion can be used multiple times in your lifetime, provided you meet the ownership and residency requirements. Life events such as marriage or moving back into the property can reset eligibility, allowing you to use the exclusion strategically.

Refinancing and Home Equity Loans
Refinancing your mortgage or taking out a home equity loan can be effective ways to tap into your home’s value.

• Refinancing: This involves replacing your existing mortgage with a new one, ideally at a lower interest rate, to reduce monthly payments or access additional cash.
• Home Equity Loans: These are loans secured by your home’s equity, providing a lump sum of cash. They typically come with fixed interest rates, unlike home equity lines of credit (HELOCs), which often have variable rates.

Joe and Big Al recommended opening a home equity line of credit (HELOC) before retirement when qualifying is easier. However, they also noted the risks, such as credit line closures during economic downturns, which could limit access to funds when they are needed most.

Reverse Mortgages
A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash, without the obligation to make monthly payments. The loan is repaid when the homeowner sells the property or passes away.

• Pros: You stay in your home while receiving steady income, potentially covering living expenses or medical costs.
• Cons: Higher interest rates and fees can reduce the amount left for heirs, and the equity in your home diminishes over time.

Joe and Big Al stressed the importance of seeking counseling before committing to a reverse mortgage to understand all implications and explore alternative options.

Creative Alternatives for Generating Income from Home
Your home can be more than just a place to live—it can also generate income:

• Renting out a room or basement: This can provide a steady cash flow, especially in high-demand areas.
• Converting a garage or accessory dwelling unit (ADU) into a rental space: This can increase income while maintaining privacy.
• Starting a home-based business: Business expenses are partially tax-deductible based on the percentage of your home used for work.
• Short-term rentals through Airbnb or VRBO: Renting out your property during peak seasons or while you’re away can provide substantial income.

However, Joe and Big Al advised reviewing insurance policies before renting to ensure coverage for potential damages or liability claims.

Viewer Questions and Practical Advice
During the discussion, viewers raised practical questions:

• Janice from Mercer Island asked about mortgage deductions for a home-based business. Big Al explained that deductions are calculated based on the square footage of the home used for business purposes, reducing both income and self-employment taxes.
• Winston inquired about Airbnb insurance. Joe and Big Al recommended reviewing homeowner policies and considering additional coverage specifically for short-term rentals to avoid gaps in protection.

Key Takeaways and Retirement Readiness Guide
Leveraging home equity can be a game-changing strategy for enhancing retirement security. Here are the key points to remember:

• Downsizing can free up significant cash and reduce expenses.
• Take advantage of the 121 tax exclusion to avoid capital gains taxes when selling your primary residence.
• Consider refinancing or home equity loans to access cash without selling your home.
• Reverse mortgages can provide income but require careful consideration due to long-term costs.
• Get creative with home-based income opportunities like renting out a room or starting a business.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.