Don't rely on your home's equity to finance retirement

By HELEN HUNTLEY, Personal Finance Editor
Published September 9, २००७

Are you counting on the equity in your home to bankroll your retirement? If so, it may be time to reconsider.

The woes in the housing market won't last forever. However, they are a reminder that housing prices don't go straight up and that there are good and bad markets in real estate just as there are for any other investment. That's an important retirement planning consideration since a home is most workers' biggest asset.

"We're hoping our home will be able to help us out quite a bit, but it's up in the air," said Mike Mulligan of New Port Richey. Mulligan, 56, has a vending machine business and helps out at his wife's cabinet business. Although they have retirement savings, they haven't added to them every year. Now, he says, they expect they'll probably keep working "longer than we really want to."

Recent research shows that many workers are counting on the equity in their homes to finance their retirements. Here are four reasons why that's risky:

- You have to live somewhere. Unless you plan to move someplace significantly less expensive, downsizing may not free up much cash after transaction costs. And of course you'll face higher real estate taxes if you stay in Florida because you'll lose your "Save Our Homes" exemption.

- You may not get the price appreciation you're expecting. Real estate prices run in cycles and can be very volatile, but over the past 40 years the return has been only a little better than investing in T-bills, according to a Fidelity Investments study. The recent run-up in prices was an aberration, not the new normal.

- Your equity may be spent. In the past two years, Americans have cashed out $622-billion in home equity through refinancing, according to Freddie Mac data. The more you owe when you retire, the less equity you'll have available to tap in retirement.

- Your timing may be bad. When you're ready to sell, market conditions may not be favorable. "A lot of people in the Florida market are trapped in their homes," said Ron Drummonds, a builder in Valrico. "People who'd like a newer, smaller home and less maintenance can't get anybody to take the other one off their hands."

So what's a worker to do?

Be realistic. Don't expect your house to bail you out from failure to save. Instead, plow money into retirement savings plans with every paycheck. And while you're at it, hedge your bets. Use stock and bond funds as well as cash reserves to help you meet your long-term goals.

Your home might come to your rescue through a reverse mortgage, but it's best to keep that possibility in reserve as a backup strategy for your late 70s or older if you find expenses outpacing your income.

Reverse mortgages get their name from the fact that the bank makes payments to you - as a lump sum, a monthly payment or through a line of credit you tap when needed. You generally make no payments as long as you live in the house. The big incentive for waiting is that the older you are and the more equity you have in your home, the more money you can get. The chief disadvantages are that fees and interest rates are higher than for conventional mortgages.

Your questions

Question: I'd like to know my credit score but don't want to pay $15 or more to get it. How can I get one for free?

Answer: The credit-reporting agencies are obligated to supply you with your credit report once a year get it through www.annualcreditreport.com, but you have to pay to get your score through that avenue. Some financial institutions provide free credit scores to customers (Washington Mutual is one). In addition, some credit-monitoring services offer a free credit score if you sign up for a free trial. You just have to remember to cancel the service when the trial period ends.

Write Helen Huntley at hhuntley@sptimes.com or PO Box 1121, St. Petersburg, FL 33731. Go to her MoneyTalk blog (blogs.tampabay.com/money) to read more about investments and personal finance.