The Untapped Potential of Homeownership

The Untapped Potential of Homeownership

June 04, 2024

Home might be where a significant portion of your retirement assets reside

In the pursuit of a prosperous retirement, investors often focus on building portfolios composed of stocks, bonds, and mutual funds. Yet, there's a significant asset class that often goes overlooked: real estate, specifically the home you own and reside in. As real estate markets continue to surge in many parts of the country, the financial potential of homeownership is rapidly emerging as a crucial part of the retirement conversation.

According to Vanguard research, about 80% of Americans over the age of 60 are homeowners, and housing wealth accounts for nearly half of their median net worth. The value accrued in these properties, which many homeowners nearing retirement are literally living on, represents a substantial and underutilized source of potential retirement income.

Revaluating Your Most Valuable Asset
For several years, the real estate market has experienced substantial growth. Home prices have increased in many areas across the United States, transforming a principal residence into a lucrative investment. However, despite its potential for high returns, the real estate market has been considerably undervalued in retirement planning.

The equity amassed in your home over the years can be considered your most valuable asset, especially when it comes to retirement savings.

There are multiple strategies for utilizing this asset effectively, each requiring careful consideration and potentially offering different advantages depending on your individual retirement goals and financial situation.

Leveraging Home Equity for Retirement
One option is to sell your home and downsize. Moving into a smaller, less expensive house or condo can unlock a significant amount of cash, which can be used to boost your retirement savings. This option may be appealing if you no longer need as much space, or if you're seeking a lifestyle change such as moving to a warmer climate, a more urban setting, or closer to family members.

Another avenue to consider is the reverse mortgage. This financial product allows homeowners aged 62 or older to convert a portion of their home equity into cash while continuing to live in the home. The loan is paid back, with interest, when the homeowner sells the house, moves out permanently, or passes away. While it may be a viable solution for some, it is crucial to remember that it's a loan, and accruing interest can significantly erode your home equity over time.

Renting out a portion of your home, or the entire property, is another possible strategy. This could create a steady stream of income during retirement. However, it's essential to take into account the costs and obligations associated with being a landlord.

A Strategic Decision
Leveraging your home for retirement is not a decision to be made lightly. It's important to consider various factors, including tax implications, the state of the housing market, your personal lifestyle preferences, and the potential risks associated with each option. It's also crucial to consult with financial professionals, real estate professionals, and potentially legal counsel to understand fully and strategically utilize this potentially substantial asset.

While market trends and individual circumstances may vary, one fact remains: for many Americans nearing retirement, the home they live in represents a significant part of their wealth. As such, it is an asset that warrants careful consideration in any comprehensive retirement strategy. As the old saying goes, "home is where the heart is." In light of these recent trends, it might be time to add, "and also where a significant portion of your retirement assets may reside."

If you have any questions regarding how your current or future real estate should fit into your overall financial plan, please call our offices to set up a meeting.

- Arise Private Wealth, South Bay Financial Advisors

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by MainStreet Journal.

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