What’s your stake in your home worth? How important is home equity to retirement?

Following is some interesting information on retirement from the Motley Fool via USA Today. As usual, the lack of preparedness for retirement is scary stuff.

As you read this consider a couple of things. Many experts today believe the 4% withdrawal rule is no longer valid so you may want to investigate that assumption further.

Also, while entering retirement debt free, including no mortgage, is highly desirable, you may want to do some calculations as to whether, given the tax deductibility of mortgage interest, it is better to invest the money you would use to make extra payments. Then at retirement you can decide to pay off your mortgage or keep paying and leave your investments to grow into your retirement years.  Just something to think about.

According to the U.S. Census Bureau’s data, the typical American’s net worth at age 65 is $194,226. However, removing the benefit from home equity results in that figure plummeting to just $43,921.

The general rule of thumb is that investors should withdraw only 4% of their retirement savings for retirement income. Therefore, it’s unlikely that most savings accounts will prove adequate funds to cover monthly expenses.

That means that most retirees are likely to be heavily reliant on Social Security to cover their bills. Because the average retiree receives just $1,333 per month in Social Security income — an amount that isn’t going to provide a lot of financial flexibility — many people may be forced to refinance or sell their homes in order to tap the equity that has been built up.

Getting back on track

Being mortgage free in retirement is a goal worth pursuing because it reduces your monthly expenses; but you shouldn’t ignore the importance of having other investments that can kick off retirement income. An approach that balances paying down debt with consistently putting away money for retirement could be best.

If you feel like you’re falling behind in accumulating equity in your home, consider making an additional monthly payment every year. That will help you build up equity quickly, while also reducing your total interest payments. At the same time, consider making changes to your monthly spending. Even small changes can free up hundreds of dollars in additional money that can be set aside every month, and that can lead to big money down the road.

For example, the average person age 35 to 44 has a median $61,500 invested in stocks, mutual funds, and retirement accounts. If a 40-year-old with that amount adds $200 per month to those investments, and earns a hypothetical 6% annualized return, then his or her account would grow to be worth $395,624 at 65.

However, if that monthly investment was increased from $200 to $500, then that nest egg would soar to $593,137. That’s a big difference, and those additional dollars could end up going a long way toward making sure that you don’t need to tap into your home equity later on in life.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

via Equity 101: What’s your stake in your home worth?.


  1. Like all long term financial planning, predicting the future is a crap shoot. In today markets, interest rates, and healthcare, I think owning a home is going to be a liability because you own assets which may disqualify you for government assistance or subsidies (thinking healthcare). Home ownership even after paying off the mortgage could cost more than paying rent.

    In my case owning a home is having a place that I can do what I want and not worrying about the leasing agreement. I never thought of it as an investment, it is money losing.

    I like the idea of investing extra money toward retirement instead a mortgage for young people starting out. I would have to run those numbers on a case by case bases.

    The one thing I warn my young friends is that interest rates will go up. My first car loan was at 18%, my first mortgage was at 10% and I was happy to get that because I had a co-worker who had a 14% mortgage. It is not a question of if but when. Right now there are first time home buyers that have only been out of school where interest rates have been too low. My advice is to build a very large emergency fund and get some equity in that house to weather higher interest rates. When the house needs a new roof or septic system, pay cash instead of 18% interest for a building company loan, or get a home equity loan at a better rate. But don’t totally forget your IRA to do this.


    1. I think you hit the nail on the head with “don’t think of your home as an investment (or ATM for that matter).


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