Cash-strapped boomer? You can retire using home equity

As the baby boomer generation moves into retirement, there is significant concern that many of them will be unable to meet their basic retirement needs.

In fact, the Employee Benefit Research Institute says that the boomers are woefully unprepared for retirement. In order to meet their income needs, baby boomers need to rely upon three major sources of wealth: retirement savings, Social Security and home equity.

Retired couple looking home
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While Social Security and retirement savings get plenty of attention, home equity as an income source is often ignored in retirement planning. Not only is the home one of the largest sources of a retiree's wealth, it also represents one of the main retirement-planning decisions: where to live in retirement.

The ability to age in place can often be undone by the retiree's need to tap into home equity in retirement. Traditionally, retirees freed up home equity by downsizing and moving to a cheaper home.

However, a recent AARP study showed that nearly 90 percent of people over age 65 want to stay in their current home for as long as possible and age in place, so other home-equity strategies need to be reviewed.

Let's take a look at some strategic uses of home equity that can enable a retiree to age in place.

Home-sharing: For a retired homeowner, one way to age in place is to engage in home-sharing. While not a traditional option for retirement living in the United States, there is a growing trend, especially among older women, to engage in home-sharing. Home-sharing can bring a new source of income to the homeowner, reduce expenses, ease the burden of household chores and provide companionship.

While home-sharing can provide many benefits, there can be significant drawbacks. To help retirees find the right situation, there are programs in more than 20 states that help match up seniors in house-sharing arrangements.

"Retirees simply cannot afford to continue to ignore home equity as an income source and still meet their retirement goals."

Home Equity Line of Credit: A HELOC, which is a more traditional way to access home equity, is typically best used in retirement for short-term needs or meeting unexpected expenses. HELOCs can help you pay for expenses related to your home in order to allow you to continue to age in place.

However, if you have limited income in retirement and your cash flow can't handle paying back the loan, a HELOC might not be the best strategy for you.

Home Equity Conversion Mortgage Line of Credit: If you need an influx of cash in retirement and want to age in place but your budget can't handle the repayment of a HELOC, one strategy is to consider a reverse mortgage.

More specifically, a HECM line of credit allows homeowners to access their home equity after age 62 without giving up ownership of the home. A HECM line of credit can be a great resource to help reduce market risk.

For example, you might be better off meeting your income needs by borrowing from your home through a HECM line of credit than by selling your stocks when they are down 20 percent.

The HECM line of credit can provide much-needed income, allow you to age in place and help to avoid depleting your savings too fast. However, as with any strategy, a reverse mortgage is not right in every situation.

Sale-leaseback: A sale-leaseback is a transaction in which the homeowners sell the home and at the same time contract to rent the home back. This enables the retirees to live in their home but also get access to their home equity today.

When applied in retirement, these sale-leaseback transactions are typically between family members (parents-children). Often, the children buy their parents' home so that their parents can have income without giving up their lifestyle and without making the transaction feel like a handout to the parents.

Many people ignore tapping into their home equity early in retirement because they know they need a place to live. However, there are a variety of strategies that can be utilized to help retirees meet their daily living and income needs without giving up the ability to age in place.

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Home-sharing, HELOCs, HECMs and sale-leasebacks are all strategies that can help retirees access their home equity today and remain in their home.

Retirees simply cannot afford to continue to ignore home equity as an income source and still meet their retirement goals.

— By Jamie Hopkins, retirement income program co-director at The American College of Financial Services