Could your home help you fund your retirement?

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Many people live in their most valuable asset. Here's how your home's value could help you retire on your terms.
For those nearing retirement, few questions loom larger than whether to sell or keep the family home. Will you remain in a house full of memories, where you may have raised your kids, celebrated holidays and lived the greater portion of your life? Or are you looking forward to setting up a home somewhere new? Beyond the emotional considerations, the choice has major financial implications: The decision to move or stay put could mean either major costs — or significant savings — for you.
By the end of 2020, Americans ages 55 to 64 held $25,000 more in mortgage debt than Americans of that age just 10 years prior, according to the U.S. Census Bureau.Footnote 1 Still, after factoring in the equity you hold in your home, you may be far better prepared for retirement than you thought you were. "The equity you've built up could be one of your most valuable retirement assets," says Debra Greenberg, director, Investment Solutions & Personal Retirement, Bank of America. "That's why it's essential to carefully think through the role it will play in your finances after you retire."
"How much equity you have and whether your mortgage is paid off, as well as the strength of the housing market in your area, are all factors worth considering as you figure out how your home can help you live the life you've always wanted in retirement," Greenberg adds. Here's how to factor your home's value into your planning.

Ready for a change

The financial benefits of relocating. Selling your home may be the most direct way to unlock the equity you've built in your house. It can also free you up to seek a new location with lower taxes and living costs. Downsizing your house could carry additional upsides, such as reduced maintenance costs and lower utility bills, both of which could help your income go further.
The equity you've built up could be one of your most valuable retirement assets. That's why it's essential to carefully think through the role it will play in your finances.
— Debra Greenberg,
Investment Solutions & Personal Retirement
Bank of America
It's important to remember, though, that housing prices can dip as we saw from 2007 to 2011 around the Great Recession. If you're nearing retirement and plan to move in the next year or two, it's a good idea to keep an eye on home sales in your area and maybe even hire someone to assess the likely value of your home in the near future.
When you do sell your home, "if you feel you need some extra income in retirement, any profit could be invested to provide the potential for growth," says Greenberg. While homes, like other assets, are subject to capital gains taxes when their cost has appreciated at the time of their sale, those taxes generally don't apply to the first $250,000 of capital gains ($500,000 for a married couple) on your primary residence if you've lived in it for at least two of the past five years and satisfy certain other rules. Consult your tax advisor on how this might apply to your situation.
When you're ready to put the newly freed cash from the sale of your home to work, think carefully about the mix of investment choices you plan to make. You'll want to try to counteract the potential inflation has for taking an ever-increasing bite out of your retirement income. One way to do that is to consider a diversifiedFootnote 2 mix of investments that offers the opportunity for paying dividendsFootnote 3 (stocks) and interest (bonds) and that aligns with your risk tolerance, liquidity needs, time horizon and goals.
Potential drawbacks. Moving can be expensive. Closing costs, broker fees and possible federal, state and local taxes can eat into the money you get from selling your home. And packing up a lifetime of stuff can be stressful, requiring lots of time and plenty of physical labor as well as standard moving costs.
Graphic showing a photo of a couple laughing together while relaxing on the front porch of their house. The text next to it reads, "More than half of all couples between 35 and 54 years old hold 51% or more of their net worth in home equity. Source: U.S. Census Bureau, 'Wealth and Asset Ownership,' 2017."

Happy where we are

The financial benefits of staying put. If you've paid off your mortgage (or are about to), one advantage of staying in your current home may be the significantly lower housing expenses. The savings could help stretch your retirement income further and free up cash for other expenses, including preparing your home for a long retirement. They also could allow you to make age-friendly improvements on your home, such as installing a new kitchen with lower, more-accessible cabinets or adding a first-floor bedroom or bathroom with a roll-in tub. These enhancements could make it easier for you to stay in your home as you grow older.
Your home's stored-up value also could help you meet your cash needs. For example, a home equity line of credit (HELOC) could be there for you in case you face large-scale medical expenses, much-needed home repairs or another emergency — thus enabling you to leave your retirement savings and investments in place while you address your current needs.
Weigh the choice to draw upon a HELOC carefully, though. Doing so will reduce your home equity and the interest you pay on it will not be tax deductible unless you use the funds to substantially improve your home.Footnote 4 And, if you lack the liquidity to make required loan payments, drawing on your investment accounts could reduce their growth potential. Your tax advisor can help you determine whether a HELOC is right for your situation and needs.
Potential drawbacks. Using funds from a HELOC to make extensive renovations to your home could mean high monthly payments. And don't forget your ability to do the work that goes into maintaining a home. Even chores such as mowing the lawn, cleaning gutters and repainting, which may seem manageable today, could become difficult as you age. You might have to pay someone to do many of the things you're currently doing yourself.
"As important as the financial considerations are, you'll ultimately have to base your decision on whether to sell your home on your own personal goals, priorities and dreams. When all is said and done, if you base your decision on the things you hold most dear, wherever you end up will feel like home," says Greenberg.
Next steps

Footnote 1 U.S. Census Bureau, "Median Value of Debt for Households, by Type of Debt and Selected Characteristics," 2010 and 2020

Footnote 2 Diversification does not ensure a profit or protect against loss in declining markets.

Footnote 3 Dividend payments are not guaranteed and are only paid when declared by an issuer's board of directors. The amount of a dividend payment, if any, can vary over time.

Footnote 4 IRS Publication 936, Home Mortgage Interest Deduction. You may be able to deduct the interest on a total of $750,000 ($375,000 if married filing separately) of loans on your home (including any mortgage). Higher limitations apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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