Home equity often ignored in retirement planning, but it could boost income and savings

Synopsis

Many retirees have most of their wealth in their homes. Experts say this housing value is often ignored in retirement planning. Using home equity, including reverse mortgages, may help increase income and provide emergency savings. Selling a house can be costly, so keeping it while accessing value may be useful. Including housing wealth could improve retirement security and financial flexibility.

Most Baby Boomers have a lot of money tied in their homes, often about 50% of their total wealth, but retirement planners usually ignore this asset. A study shows the value of homes in retirement wealth has increased over time for older Americans.

For people aged 60–69, home value grew from about 40% of their wealth in 1989 to just over 50% in 2022. For those aged 70–79, the share also rose from around 38% to about 50% during the same period. Among 15 million middle-wealth Boomer households, average home equity is about $750,000 from total net worth of $1.75 million, as per Kiplinger analysis.

Why housing wealth is often ignored

Most retirement plans do not include home equity as a source of income or savings. Even though reverse mortgages are heavily promoted, planning tools treat them only as loans, not as useful assets. Planning systems often see reverse mortgage credit as equal to selling the house, not as flexible cash. Some experts worry about reverse mortgages due to high fees and closing costs.

Others fear the loan could eat up home value over time. Many retirees follow the belief “no mortgages in retirement.” Planning focuses mostly on income, not liquidity or leaving money to family. Experts say retirement goals should include the “Three L’s” — income, liquidity, and legacy, as stated by Kiplinger. Some advisers are not licensed to offer all financial products, including reverse mortgages. This makes it harder to include housing wealth in full retirement plans. Many advisers are trained to see homes as illiquid assets unless sold.

Why housing wealth should be included

Using home equity with annuities can increase retirement income. It can also provide tax benefits and extra savings for medical costs. Unexpected costs like long-term care or helping children require extra cash. Selling a home to get money is expensive and stressful. Selling costs can be 10%–15% of the house price. Taxes on gains can add another 10%–20% cost.

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A $2 million home sale could cost $250,000 or more in total. Reverse mortgages called HECMs have government protection. If loan balance exceeds home value, families do not owe extra money, as backed by U.S. Department of Housing and Urban Development. HUD insurance covers the difference for lenders.

Historical studies show home values and rates often perform better than expected. Training programs are being developed to teach advisers about housing wealth. One such effort is being built by National Association of Insurance and Financial Advisors.

How housing wealth can be used in retirement planning

Experts suggest combining all assets — savings, IRA money, and home value. Plans should compare two options — one with housing wealth and one without. Around 80% of retirees prefer aging in place instead of selling homes, as noted by Kiplinger. One strategy combines reverse mortgage with annuity for income and liquidity. Another scenario assumes selling the home later, around age 85.

Example shows a 67-year-old retiree with $1 million in three asset types. Plan using housing wealth produced higher starting income. Plan with housing wealth also showed larger inheritance at age 95. Advantages came from using home equity between ages 67 and 84. Avoiding selling costs and taxes also improved results. Both plans benefited from lifetime annuities.

Overall investment returns were similar in both methods. Experts say including home equity gives retirees more flexibility. Since homes make up about half of retirement savings, ignoring them may reduce benefits. Future discussions will look at tax efficiency and risk management.

FAQs

Q1. Why is home equity important in retirement planning?

Home equity can give extra income and savings in retirement, but many planners ignore it, says Kiplinger.

Q2. What is a reverse mortgage and why is it discussed?

A reverse mortgage lets retirees use their home value for cash without selling the house.

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