Whether you’re a late starter or a savvy saver, you want to maximize every retirement asset you have. If you’re like most people, that means contributing the maximum amount into retirement accounts like 401(k)s, 403(b)s, and IRAs. And while that’s a swell idea, one thing you may be overlooking is your home.
The reason your home is often not included when taking inventory of retirement assets and constructing a financial plan is because it’s typically considered a personal asset. After all, you need a place to live, and your home is probably not your most liquid asset.
However, by not taking your home into account, you could be ignoring its potential. If it’s not your biggest asset, it could at least be your most appreciated. As we’ve seen recently, the housing market has the potential to take off, and if it does, you could be sitting on a huge amount of equity—and you can use that equity in a number of ways to help finance your retirement. Here’s how:
Capital Gains from the Sale of Your Home May Be Tax-Free
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income if you’re single or $500,000 if you’re married filing jointly (MFJ). To qualify for this tax exclusion, you need to have owned and used the home as your main residence for at least two out of the five years before selling the home. However, the two years in which you used the home as your main residence do not need to be consecutive.
Let’s say you and your spouse bought a house in 2002 for $190,000. You lived in it all this time, and it’s where you raised your family. You probably did some things to update it over the years, and maybe the town or neighborhood around you saw a boon in popularity. Now, 20 years later, that house is worth $550,00. Since you owned the house as your main residence for two of the last five years, if you sell it for $550,000, you and your spouse might not be taxed on that $360,000 gain. This is significant because, with the sale of any other asset, a gain of that size would typically be taxed at long-term capital gains rates.
Tips for Using Home Equity in Retirement
Not having to pay taxes on the sale of your home affords you a number of opportunities in retirement. If we stick with our previous example, there’s a lot you could do with the $360,000 of equity you have sitting in your home. Here are a handful of options:
1. Sell Your Home and Downsize
Retirees routinely sell their homes and move to a smaller house, condo, or apartment. You’ll always need a place to live, but if you’re an empty nester, you likely don’t need the same amount of space you did when you had kids living at home.
Whether you buy or rent, smaller homes typically mean smaller price tags (depending on where you decide to move). Anything left over after selling your current home and moving to a newer, smaller one can be used to fund the retirement of your dreams. You can even use it to get a second, vacation property!
2. Sell Your Home and Invest the Proceeds
Another option after selling your home is to invest the proceeds. If we continue with our previous example, you’ll still need to find a new place to live, but assuming you don’t pay more in rent or mortgage than you did on your old house, you can essentially put your entire $360,000 gain into various investment accounts. If you’re not comfortable with that, you can invest some percentage of the proceeds and put the rest into savings. Regardless, by investing the proceeds from the sale of your home, you give that money a chance to grow, which could end up being a huge plus for your retirement nest egg.
3. Rent Out Your Home to Create an Additional Income Stream
One possible way you can use the equity in your home in retirement is to rent it out. You wouldn’t necessarily need to sell to make money off it, and since there can be some hidden costs associated with moving in retirement, this might be the more attractive option. If you find yourself with too much extra space after the kids have moved out, you could look into renting those rooms.
Another option is if you do decide to sell and downsize to two properties, one could be rented out through vacation rental companies like Airbnb or Vrbo. If you rent out the second property any time you’re not using it, it could pay for itself—leaving more in your pocket.
4. Look into a Reverse Mortgage
A reverse mortgage is a type of loan that allows homeowners ages 62 and older—typically who have paid off their mortgage—to borrow part of their home’s equity as tax-free income. Reverse mortgage’s work just the same as regular mortgages, except instead of you paying the lender, the lender pays you.
The proceeds from a reverse mortgage can be used to pay for living expenses, health care, or other retirement costs—all without having to dip into your other sources of retirement income. However, there are some caveats, so you’ll want to familiarize yourself with all the nuances before you pursue a reverse mortgage.
Maximize Your Retirement Assets
Studies have long shown that running out of money is the number one fear among retirees. That’s why it’s so important to make sure you’re getting the most out of your retirement assets—including your home. By talking to a financial advisor, you can make sure you’re doing everything possible to achieve your retirement goals. Reach out today to get started crafting a comprehensive financial plan.
