So you want to retire, or at least make work optional now or soon.
You have minimal savings or investments but have equity in your home.
Should I count home equity as retirement savings?
Home equity can be considered as part of your retirement savings. However, it’s essential to remember:
- Home equity is illiquid unless sold or refinanced.
- Market fluctuations can affect property values.
- Relying solely on home equity can be risky.
- Diversifying retirement assets is advisable for financial security.
Here are a few ideas why this might or might not be a good idea for you.
Does home equity count as retirement savings?
Certainly! Home equity is often considered a form of “hidden savings” that can potentially be tapped into during retirement.
However, it’s crucial to distinguish between home equity and traditional retirement savings like pensions or Individual Savings Accounts (ISAs).
While owning a property outright can reduce living expenses, the equity is not as liquid as money in a savings account.
You can’t easily make withdrawals for day-to-day expenses or unexpected medical bills.
Options like downsizing or equity release schemes exist, but they come with their own sets of challenges and costs.
Therefore, while home equity can be a valuable asset in your golden years, it shouldn’t be your sole reliance for retirement funding.
It’s more of a financial safety net or a supplement to other, more liquid forms of savings.
Can home equity be used for retirement?
Retirement is one of the most common reasons why someone might downsize their house.
When you downsize your house, you can cut many of your expenses, freeing up more of your money for retirement.
Home equity can boost retirement savings, but it comes with some unique challenges that may need to be managed closely to ensure a positive outcome.
Why releasing equity might be a great idea
If you bought your house some time ago, paid off a substantial chunk of the mortgage, and the property has gone up in value, you might well be sat on a lot of equity.
Equity is the portion of the house that you own.
If you could free up this money, it could be used to buy a smaller place outright, fund the lifestyle you would like, helping family members or funding your longer-term care.
Downsizing your house will also likely reduce a lot of your monthly bills.
A smaller place is cheaper to heat, light or keep cool. Taxes, insurance, and maintenance are likely to be lower and more affordable.
It could be that downsizing and using the larger property’s money allows you to move to a better area. Closer to shops, family or amenities that you want to use. Fix
A smaller place should be easier to maintain as there’s less to fix, maintain, or go wrong.
Why downsizing for retirement might be a bad idea
Selling and buying houses can be expensive.
Even if properties are small, there are a number of costs to consider in the moving process.
- Deposits required for the new place.
- Stamp duty
- Valuation fees
- Survey fees
- Conveyancing legal fees (to buy and sell)
- estate agents fees
- Moving costs
- Charges for leaving an existing mortgage
All these fees can eat into any profit from the sale, making the windfall substantially smaller than first thought.
What can you sell your house for and when?
You need to understand the likely valuation of your home. There are numerous websites nowadays that will give you an indication of what you might get.
What’s the difference between what you might get and what you need?
Knowing your numbers will be key here to understand after all the fees, costs and hassle of moving, will you have enough for a comfortable retirement – and for how long?
Are you prepared for the hassle?
Selling your house, finding another, packing all your things and moving. Settling into a new place and reestablishing your social network all in your older age years.
Will you miss the space or location?
Maybe a smaller house is cheaper, but it no longer has the room. Will this be a problem for visiting friends and families?
If you have lived somewhere for a long time, will you want to move to a new location that may or may not be more convenient for your needs?
How about the neighbours and friends that you like, won’t you miss them?
Know why you want or need to move
This will help you way up the pros and cons of downsizing and what problems it might solve and create in your life.
If it’s a smaller space, a different place or less expensive, all of which may come with compromises that are difficult to take at a later stage in life.
Figure out how much you need to retire
What does a good retirement look like to you?
What do you think that’s going to cost?
Understanding and planning for the retirement lifestyle you would like is crucial to achieving it.
Knowing and few key numbers can help set you on the right track to creating a financial plan.
- Current expenditure
- Savings rate
- Your net worth
- Your freedom number
If you know what you currently spend and think you would like a similar lifestyle, you can understand what good looks or needs to look like.
Your savings rate helps to identify how much of your income you get to keep, and with a bit of budgeting, you can see where it all goes. Once you know where it all goes, you can see if it’s in alignment with your goals and values and if any holes can or need to be plugged.
Your net worth helps you understand where you are starting from and the gap you have to reach your freedom number.
Your freedom number is 25 x your annual spend. This figure will guide you on how much you need to make work optional or retirement.
As an example: let’s say you spend £30,000 per year. £30k X 25 = £750,000.
If you withdrew 4% a year from £750,000 invested in low cost globally diversified index funds, it could give you an income of £30k without eating into the capital.
This is known as the 4% rule of thumb. It’s a guide, and there are a few things to consider in terms of market conditions, how long you live and cost of living changes, but it does at least give you an idea of what you might need.
Pros and Cons Table: Should I Count Home Equity as Retirement Savings?
|Home equity can be converted into cash through downsizing or equity release.
|Home equity is less liquid than traditional savings, making it harder to access quickly.
|Adds another layer to your financial safety net, diversifying your retirement assets.
|Relying solely on home equity can be risky, especially if property values decline.
|Owning a property outright can reduce living expenses, freeing up more money for retirement.
|Downsizing or moving can incur significant costs, reducing the net gain from selling.
|Lifestyle and Location
|Releasing equity can allow for lifestyle improvements and potential relocation.
|Emotional and social factors, like leaving a long-term home or community, can be challenging.
|Downsizing can reduce maintenance costs, making it easier to manage your property.
|Smaller properties may lack the space or features you’re accustomed to, affecting your lifestyle.
|Knowing your ‘freedom number’ can help you make informed decisions about using home equity.
|Poor timing or valuation can result in financial setbacks, making your retirement less secure.
|Some equity release schemes may offer tax benefits.
|There may be tax implications when selling your property or releasing equity.
|Flexibility in Retirement
|Home equity provides another option for generating retirement income.
|It may lock you into certain choices, like needing to sell or move, that you might not prefer.
FAQ: should I count home equity as retirement savings?
Does equity count towards net worth?
Yes, equity does count towards your net worth. It represents the value of an asset you own, such as a home or business shares, minus any associated debts.
Can I use my house to fund retirement?
Absolutely, your home can indeed serve as a financial resource for your retirement, but there are various methods and considerations to keep in mind. Here are some options:
Downsizing: Selling your current home and moving to a smaller, less expensive property can free up a lump sum of money. However, moving costs and the emotional aspect of leaving a family home are factors to consider.
Equity Release: This allows you to unlock the value of your home while still living in it. There are different types, like lifetime mortgages or home reversion plans, each with its own set of terms and costs.
Rent Out Space: If you have extra rooms or an annex, you could consider renting them out for additional income. Make sure to understand the tax implications and your responsibilities as a landlord.
Reverse Mortgage: Similar to equity release but more common in the U.S., this allows you to borrow against your home’s value. The loan and interest are repaid when you sell the home or pass away.
Sell and Rent: You could sell your home and then rent a property. This frees up your equity but turns it into a liquid asset. However, you’ll have to deal with rental costs and the lack of property ownership.
Each option has its own financial and emotional implications, so it’s advisable to consult with a financial advisor to explore what suits your retirement plans best.
Is property the best investment for retirement?
Property can be a good investment for retirement, but it’s not necessarily the best option for everyone. It offers potential for capital growth and rental income, but also comes with risks like market downturns and maintenance costs. Diversifying your investment portfolio is generally recommended for a balanced retirement strategy.
Does home equity count as savings?
Home equity is often considered a form of long-term savings, but it’s not as liquid as traditional savings accounts. It’s an asset that can be tapped into through various methods but is not readily accessible for immediate needs.
Should I include home equity in retirement savings?
You can include home equity as part of your overall retirement savings strategy, but it shouldn’t be your sole reliance. It’s less liquid than other forms of savings and may require significant steps to access.
Does equity count as savings?
Yes, equity in assets like a home or business is generally considered a form of long-term savings. However, it’s not as liquid as money in a traditional savings account.
Summary: Should I count home equity as retirement savings?
- Downsizing needs to be done wisely with a consideration of all the advantages and disadvantages.
- Determining how much your house is worth and when you will get that will be critical to understanding if downsizing is a realistic long-term retirement strategy. If retirement is a long way off, it might be a very flawed exercise and no better than putting your finger in the air.
- Don’t forget that moving house comes with a lot of hassle, costs and uncertainty. Relying on this as a retirement strategy may be a risky recipe.
- Your retirement might well last a long time, so better to have many sources of income that rely on a big immovable rock, i.e. your house.
- Make sure you understand how much a comfortable, dignified and independent retirement costs and figure out how to cover those costs from various sources, investments, savings, work or private pensions, state pension, and possibly downsizing at some point. Don’t rely on just one.
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