Want financial security? Home equity and retirement accounts are key
It might seem obvious, even simplistic. But having home equity and retirement accounts are key to most families' financial assets and — by extension — retirement security.
According to new research from the nonpartisan Employee Benefit Research Institute (EBRI), home equity and retirement accounts — 401(k)-type plans and IRAs — account for nearly all the assets that many families have to depend on in retirement outside of Social Security and traditional pension plans.
In its research, EBRI looked at the level of assets held by families with a working family head ages 25‒64 in so-called "individual account" retirement plans and compared those levels with all of their financial assets, as well as equity in their homes.
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And what EBRI discovered was this: Families with individual account retirement plans and home equity will have something to draw from for retirement expenses, outside of Social Security, while those families without retirement plans won't.
So, what might those saving for or living in retirement do or not do given EBRI's findings?
For those saving for retirement. Sterling Raskie, a certified financial planner with Blankenship Financial Planning recommends that you start saving for retirement as early as possible using either an employer-sponsored plan such as a 401(k) or an individual plan such as an IRA.
And don't worry if you're not socking away as much as possible in your retirement accounts when you're in your late 20s, early 30s. The EBRI research seems to suggest that you'll build your nest egg over time. In fact, in the EBRI research, assets in retirement accounts represented 47.1% of all financial assets held in families with a working head of household ages 55-64.
Buy a house. Consider buying a house if you don't own one, paying down your mortgage as fast as possible. Why? "Home equity is a very important asset for American retirees, and so it is important to think about how to make best use of home equity in retirement planning," says Wade Pfau, professor of retirement income at The American College of Financial Services and author of Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement.
Others also say home equity is an important part of a sound retirement plan. "Social Security and home equity are major pieces of the retirement puzzle," says Randy Bruns, a private wealth adviser with HighPoint Planning Partners."But for most individuals, the primary focus is all too often how much has been saved in their retirement accounts.If you ask me, that's one of the biggest flaws I see in retirement planning."
Raskie also says homeowners who pay down their mortgage faster can boost the chances of a better retirement outlook. Paying down the principal on your mortgage will increase the value of your home equity. "This can be considered a guaranteed rate of return with no risk," he says.
Also, homeowners might evaluate what effect upgrading homes over the years might have on the value of their home equity. "Understand the impact upgrading homes during a career or taking out a mortgage just before or in retirement can have on long-term financial goals," says Raskie.
For those in retirement. Retirees who are concerned about cash flow – about having enough income to cover their expenses – might consider downsizing their homes if they don't need as much space, says Raksie.
There are tax benefits to selling one's house worth noting as well. According to the IRS, if you sell your home at a significant profit (gain), some or all of that gain could be taxable. However, in most cases, if the home you sold counts as your main home, the first $250,000 of gain isn't taxable—$500,000 if you are married and filing jointly. Read Publication 523, Selling Your Home.
"Additionally, those with high amounts of home equity can consider using a reverse mortgage to insulate their retirement portfolio withdrawals and decrease the chances of portfolio failure," says Raskie.
Randy Bruns, a private wealth adviser with HighPoint Planning Partners, also says a reverse mortgage is an important tool in the retirement-income toolbox. "Reverse mortgages have become a critical component of retirement planning," he says. "A reverse mortgage line of credit can greatly reduce sequence of return risk by providing timely access to cash so you won't have to sell investments until after markets have recovered. The hope is that a reverse mortgage line of credit can act as a standby source of liquidity in the kinds of instances that would otherwise lead to financial ruin for your portfolio."
Consider if and when debt useful. For those saving for and living in retirement, Raskie recommends "carefully considering if and when any debt is necessary." The EBRI research seems to suggest that those who prioritized savings versus debt, are in a much better position for retirement.
Read EBRI's report, Importance of Individual Account Retirement Plans and Home Equity in Family Total Wealth.
Consider a balanced approach to retirement planning. "The risks you'll face in retirement are unlike any you faced during your working years," says Bruns."The more flexibility you build into your cash flow, the more likely you'll be to manage those risks.That's why a balanced approach using financial assets, home equity, and the optimal Social Security claiming decision deserves considerable attention as you transition into retirement."