The Boulevard to Financial Independence

As the housing market does a nose dive in certain areas of the country and analysts suggest that we’re not yet through the worst of it as adjustable rate mortgages continue to reset, many people nearing retirement are getting a bit more anxious.  Somewhere around 50% of Americans are counting on their home as a significant part of their retirement nest egg.

I had coffee last week with someone and he started talking about Boulevard R’s calculations.  He assumed that we were counting the equity in his house as an asset that could be counted toward his retirement.  Lots of Americans are counting on the recent gains in the housing market to fund their retirement.  Unfortunately, your home is not something that you want to bank on.

First of all, you have to live somewhere, unless you plan on selling your home and spending the rest of your life living on a tropical beach in a tent (doesn’t sound half-bad, though it might be hard to fit all your furniture inside).  Second, you’re not going to get nearly as much money out of your house as might think.

Randy laid out the math nicely in an earlier blog post.

There are a lot of expenses when it comes to tapping the equity in your home.  Naturally, banks and other lenders are particularly good at getting more of your assets into their pockets.  Up until recently, I believe that the market capitalization of financial services companies included in the S&P 500 accounted for over 20% of its total value.  It’s quite rare for any sector to be so dominant and it’s a position that financials have held for multiple years.

So soon, Boulevard R is going to be implementing a new feature to allow users to count the equity in their home (though we don’t recommend it and urge consumers to beware of reverse mortgages, at least until they become a more reputable financial transaction without so many hidden fees or with such poor conditions).  The stark reality is that for many Americans, they’ve saved so little they’re going to need to tap into all the assets they can.

One more reason to do all you can to get on track now, even if that means delaying retirement a bit.  Just don’t get stuck in the trap that you can just work forever.  According to McKinsey, 40% of current retirees were forced to stop working earlier than they had planned, primarily through either layoffs or becoming disabled on the job.

There are a lot of downers when it comes to retirement.  There’s hope though- if you understand where you stand, become better informed and start to make incremental changes now, you’ll be able to navigate to a secure retirement.

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By Randy

I hear it from clients all the time, “My house is my best investment for retirement.” Unfortunately your “investment” is also the place you live and therefore is not really an investment. Don’t get me wrong, there are a lot of smart financial reasons to own a home, but don’t fool yourself into thinking that your home will also provide for your retirement. It’s a great feeling to have equity in your house but unless you have a hankering to live on the street, it will be much harder to utilize that equity in retirement than you think.Borrowing against the equity is not really an option. For example, assume you’re 65, and you live in a house you paid $50,000 for many years ago that is now worth $1 million. Let’s further assume that you only have a $100,000 mortgage so your actual equity in the house is a whopping $900,000. It’s tempting to think of that $900,000 as your retirement nest egg, the problem is you need to get access to that equity in order to be able to spend it. Sure you can borrow but since you’re retired you’ll need to make payments on the loan from the proceeds you borrowed. A $500,000 loan at 6% (if you could even get it) would require payments in excess of $36,000 every year. If you only spent half the $500,000 for retirement and set the other half aside to make your loan payments, your reserve to make loan payments would be gone in less than 7 years, leaving you with another 23 years of payments to make.

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