By Henry K. (Bud) Hebeler


Almost any of the major retirement planning computer programs has an entry for the value of your home and your estimate of its appreciation rate. Before you enter any values here, you want to think about the implications. There are just too many uncertainties in your future, and counting your home may mislead you into saving too little otherwise.

Middle aged people who have not saved enough money, often say that their home is their major retirement investment. This is a lot better than saying that their major retirement investment is the weekly purchases of state lotto tickets, but is your home truly a retirement resource? You have to question this from your own perspective, but even the most foresighted people can't foresee all of the twists and turns ahead in their lives nor the emotional and financial considerations that will apply in the future.

A home is a lot more than something you can just trade in for another investment. It has emotional ties and meets certain family needs. It has neighbors that you like or close friends nearby. It represents years of your effort in tailoring to meet your tastes. The furniture, decorations, mementos, and even quirks are things that you have learned to enjoy. It has a support system around it to help you when you are in trouble.

A home is a peculiar financial resource. It has no liquidity, and you can't just go out and get money by selling off a corner of the lot or marketing a room that you figure you can do without. You must either sell the whole home, or not sell it at all, although you might be able to take in a renter or borrow on it. After you sell, you must either buy a new home or become a renter. If buying, you will probably increase your indebtedness with a larger mortgage than you had before.

Selling a home and buying a new home is always a traumatic experience, but the level of trauma increases as you get older. It's harder to part with things, your living habits get more inflexible, and you wonder how you are going to find a new services such as doctors and medical support facilities.

Both my wife and I have gone through these experiences a number of times with our parents. The situation was quite different for her parents than mine, but always there was lots of emotion and trauma.

My parents sold their home several times both to gain some funds from downsizing as well as to keep close to my sister and her children. My sister was great at setting up all of the mechanical things in advance such as finding affordable houses to look at, doctors, etc. But it was a lot of work for her. Ultimately, my mother died, my father sold the last home, and he moved into an assisted care facility. The "downsizing" gave precious few extra dollars for investment as a practical matter, and the proceeds from the final sale went into additional costs of the assisted care facility.

My wife's mother brought up two daughters on the salary of a waitress and managed to buy a small home at the same time. Needless to say, it was very hard for her mother to consider selling something that had been such a large part of her life and something she had worked so long to achieve. She finally conceded to the pressure of harsh winters and the need for increased services. Again, the money went into assisted care.

In the cases of both my and my wife's parents, their homes were not a source of funds for ordinary expenses. Rather they were a reserve for things unseen.

If you've already retired, what are some of the things that you can do to recognize some return from your home that you can use?

A very practical option is to rent out a room. If the home owner is elderly or disabled, it may be a fair trade to provide free rent in exchange for some home care assistance.

Another option is to take out a home equity loan or refinance the home. Of course the problem with this is that these loans are accompanied with an increase in monthly expenses to make the payments. You're either betting that, on an after-tax basis, you can get more from investing than the lender can get from the interest on the loan, or you're betting that you will die before the whole amount is due, so the remaining debt will be someone else's problem. Unfortunately, you may well lose the bet on both counts and be left up the creek with no more options and the probable loss of the home altogether in a sheriff's sale.

Still another option is a reverse mortgage. However, there is no way you can come close to getting most of the money for your home back this way. The lender has to assume that you will live longer than the average person when setting up the terms. And you will have to pay loan fees. If you are not yet retired and your future plans are based on this option, you might use only 40% 50% of your home equity as an asset in the retirement expense calculation.

The fact is that if you need some equity from your home for retirement, you may be better off to bite the bullet as early as possible, even before retirement, and really downsize to whatever is the least cost arrangement that is tolerable. Then invest the money and meter it out very slowly and conservatively over your retirement years. I've seen too many people who felt they should have taken these draconian actions earlier. Also, be prudent and don't use your home equity in retirement plan calculations.