Matt O’Hara, Head of Portfolio Management and Research, Unison.
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According to the Transamerica Center for Retirement Studies, fewer than a quarter of U.S. workers surveyed feel very confident in their ability to retire comfortably at some point. Among non-retirees, about the same number (25%) reported having no retirement savings at all, and only 40% of those surveyed in the Federal Reserve’s 2021 Economic Well-Being of U.S. Households report felt they were on track in saving for retirement.
Record-high inflation and rising interest rates are squeezing household budgets, further complicating the retirement equation for many Americans. At the same time, total U.S. home equity reached $27.8 trillion in the first quarter of 2022, a record high. Of that number, more than $11 trillion represents “tappable” home equity (how much homeowners can borrow while retaining at least 20% of their equity). Homeowners may be sitting on record levels of wealth—and many are considering options for tapping into their home’s value to take back control of their financial health as they approach retirement.
Downsides To Downsizing
For many seniors, downsizing into a smaller property for their retirement years often seems like the financially savvy path forward. But under current economic circumstances where home prices remain elevated, rates are rising and inflation is high, downsizing may not yield the financial payoff these homeowners are looking for. In some cases, homeowners find that the asking prices for smaller homes in their desired area are comparable or equivalent to the proceeds they would net from selling their existing property, which significantly diminishes the value of downsizing. Selling a home can also trigger capital gains taxes, and even under the best of circumstances, moving is a hassle.
Of course, if homeowners are struggling to manage a home that is too large for their needs, downsizing can be a practical option. However, there are other ways for homeowners to access the equity in their homes to support their retirement.
Home Equity Sharing
For homeowners who would prefer to stay in their homes in preparation for or during retirement, options for leveraging their equity include a home equity line of credit (HELOC), reverse mortgage or equity sharing agreement.
Instead of taking on more debt, as is the case with a HELOC or reverse mortgage, with an equity sharing agreement, there is no debt, monthly payments or interest, which can be a burden, especially for homeowners who are already retired or planning for their retirement. Equity sharing agreements enable homeowners to tap into existing, but unused, equity in their home instead of taking on more debt or even using funds from their retirement plan.
Once a homeowner has obtained cash in exchange for a home equity sharing agreement interest in their house, the money can be used as the homeowner sees fit: one option is to use the money to create an income stream. There are many ways to do this ranging from investing in a REIT, buying a balanced fund and liquidating shares as needed for consumption, as well as buying guaranteed income products. Another option is to pay down existing debt or to make improvements to the home to ensure it remains a functional space as they age, like installing an elevator or a walk-in shower with a bench.
An important difference between a home equity sharing agreement and debt is that the value of the agreement floats up and down with the value of a home, meaning the value of the house will pay it off when a homeowner ultimately decides to sell. That compares favorably to debt that is payable under all circumstances.
There is no denying that we face a retirement savings crisis in America. Especially in times of market volatility and uncertainty, homeowners need access to resources that allow them to leverage their home equity in retirement. Shared equity agreements represent one option that provides homeowners access to cash without taking on added debt. For those who feel unprepared or behind in retirement savings, this is one option to explore and research as you take steps toward a more secure financial future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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