In this article:
- Get a Cash-Out Refinance
- Sell Your Home and Buy Something Less Expensive
- Get a Reverse Mortgage
- Other Ways to Supplement Your Retirement Savings
Retirement income can flow from a variety of sources. That includes retirement accounts, investments, Social Security benefits, annuities, permanent life insurance and personal savings. If you need a little extra to supplement your retirement savings, however, using your home equity to fill in the gaps may be an option.
A common rule of thumb is to have at least 10 times your current salary saved by age 67. If you're going into retirement below that target, you're not alone. About 70% of current retirees wish they'd saved more and planned earlier for retirement, according to the Employee Benefit Research Institute.
Home equity is one more resource that could help bolster your cash flow in retirement. Below are some different ways to convert home equity into retirement income.
Get a Cash-Out Refinance
A mortgage refinance involves taking out a new home loan and using that to absorb your outstanding mortgage balance. The process is similar to taking out a mortgage when buying a home. Your credit, income, debts and assets will all factor into the interest rate you get on your new loan. A cash-out refinance works in much the same way, except the new mortgage is larger than the balance on the old one. You can use those excess funds for all kinds of things, including retirement income.
You'll likely need significant home equity to qualify for this type of refinance loan. Lenders generally allow you to borrow up to 80% of your property's value. That includes the original loan balance plus the cash overflow you're hoping to get. Let's say your home is worth $375,000 and you have $200,000 left on your mortgage. If you qualify, you might get up to $100,000 in cash. Your new loan balance would then be $300,000.
A cash-out refinance loan could provide quick access to retirement income, but there are some drawbacks:
- Your loan balance will increase.
- Your monthly payment will likely go up.
- Closing costs typically range anywhere from 2% to 6%.
- You'll need to go through the mortgage application process. Your home equity, credit and debt-to-income ratio will all factor into your approval and interest rate.
- Your home could go into foreclosure if you default.
If you're concerned about your ability to keep up with your new mortgage payment, a cash-out refinance might not be your best bet. It's also not a great option during periods of high interest rates, as the rate on your new mortgage may be much higher than it was before.
Sell Your Home and Buy Something Less Expensive
Downsizing is another option. Selling your home and moving to a less expensive property could provide a lump sum of cash to pad your nest egg. A number of factors will determine your home's value. That includes:
- Prices of comparable properties in your area: What are similar homes selling for? Real estate comps can help you estimate your home's value.
- Your neighborhood: Your home's proximity to schools, jobs, public transportation, shopping and entertainment can attract or deter potential buyers. The same goes for the crime rate and the quality of local schools.
- The age and condition of your home: If your home is outdated or in need of major repairs, that could drag down its value. Larger homes may also fetch higher prices than smaller ones. The desire for a larger space is one of the top reasons people buy new homes, according to data from the National Association of Realtors.
- The housing market: The typical home value in the U.S. has increased nearly 43% since 2020, according to Zillow data from January 2023, but the housing market is constantly in flux. This will influence how much you sell your home for and the cost of purchasing a new home.
When Downsizing Makes Sense
- Your home has gone up in value.
- You've got significant equity and, in turn, can keep more of the profit.
- You've found a new home you like that's more affordable.
When Not to Downsize
- Closing costs and real estate agent fees will take a big bite of your profits.
- Buying a new home won't lower your monthly payment or provide significant cash for retirement.
Get a Reverse Mortgage
A reverse mortgage is a home loan that allows retirees to trade home equity for cash. The home is used as collateral, which means you won't need to move or sell the property. It can provide upfront cash, fixed monthly payments or a credit line that you can draw on as needed. It's similar to a home equity loan or line of credit, but with one major difference: You don't have to repay it. Instead, the lender is repaid from outstanding equity later on. This can happen when the homeowner:
- Passes away
- Moves
- Becomes delinquent on property taxes, homeowners association fees or insurance
- Fails to keep the home in good condition
Reverse mortgages are usually available to homeowners who are at least 62 years old and have substantial home equity.
There are several types of reverse mortgages. The most common is called a home equity conversion mortgage, which is insured by the Federal Housing Administration. In 2023, these are capped at $1,089,300.
That can go a long way in retirement, but there are some serious caveats. You'll need to cover application fees, home appraisal costs and closing costs. You'll also need to continue making good on your primary mortgage payments. If the home falls into disrepair or no longer serves as your primary residence, you could lose your home. What's more, your heirs will either have to pay off or refinance the reverse mortgage if they want to keep the property.
Other Ways to Supplement Your Retirement Savings
If you lack home equity or aren't comfortable borrowing against it, there are other ways to supplement your retirement income. That might include:
- Delaying Social Security: You can begin collecting Social Security at age 62, but your benefit will be larger if you delay it until at least your full retirement age. That's 67 for those born after 1959. Waiting could increase your benefit by as much as 30%.
- Picking up a part-time job: That may be retail work at a local store or consulting within your former industry. Working a few hours a week can help boost your income and keep you active in the community.
- Continuing to invest: A well-allocated investment portfolio can cover income gaps during retirement. That doesn't mean you have to assume a ton of risk, but maintaining some exposure could help you keep up with inflation when you're no longer working. A financial professional can provide personalized guidance here.
The Bottom Line
If you're looking for ways to round out your retirement income, your home equity could be a viable option. A cash-out refinance loan or reverse mortgage are two ways to go about it. Just remember that you could lose your home if you're unable to hold up your end of the agreement. Downsizing to a less expensive home is another option, assuming the numbers work out in your favor.
Cash flow is a key part of living the life you want in retirement. Maintaining strong credit is just as important. Retirees may be susceptible to identity theft scams that target seniors. Free credit monitoring with Experian is a simple way to safeguard your credit at any age.
FAQs
How do I use my home equity in retirement? ›
- Home Equity Loan. A home equity loan—also known as a second mortgage—allows a homeowner to cash out some of their home equity. ...
- Home Equity Line of Credit. ...
- Reverse Mortgage. ...
- Home Downsizing.
“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 things worth considering as you figure out how your home can help you live the life you've always wanted in retirement,” Greenberg adds.
How much does the average 60 year old have saved for retirement? ›The above chart shows that U.S. residents 35 and under have an average of $30,170 in retirement savings; those 35 to 44 have an average $131,950; those 45 to 54 have an average $254,720; those 55 to 64 have an average $408,420; those 65 to 74 have an average $426,070; and those over 70 have an average $357,920.
How much do I need to retire if my house is paid off? ›One rule of thumb is that you'll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office good-bye.
What is the smartest thing to do with home equity? ›Paying off high-interest loans or investing the money back into your house via upgrades or repairs can be a fruitful way to spend equity. For example, if you need a large amount of cash but don't want to change your first mortgage, a home equity loan might be a more attractive option.
Is it smart to take all the equity out of your home? ›DON'T take out excessive equity.
Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home.
401(k) loan all comes to your personal circumstances. If you need to borrow more than $50,000, a home equity loan or HELOC may be the better option. With the stock market down, like it is right now, it does not make sense to borrow from your 401(k) until your investments have had time to bounce back.
Does home equity count as income? ›Home equity isn't taxed when you haven't tapped it. However, if you're looking to take advantage of the equity you've built, you're probably wondering when it becomes taxable. The only time you'll have to pay tax on your home equity is when you sell your property.
Is it worth cashing out home equity? ›A cash-out refinance can be a good idea if you have a good reason to tap the value in your home, like paying for college or home renovations. A cash-out refinance works best when you are also able to score a lower interest rate on your new mortgage, compared with your current one.
What is the average 401k balance at age 65? ›Many U.S. workers retire by the time they reach 65. Vanguard's data shows the average 401(k) balance for workers 65 and older to be $279,997, while the median balance is $87,725.
What is the average Social Security check? ›
For those who are collecting Social Security at age 65, the average payment in 2022 is about $2,484 a month, according to the Social Security Administration. That's based on the agency's estimate that the average annual benefit is $29,806 for Social Security recipients who are age 65.
How much does the average retired person live on per month? ›Average monthly expenditures for those 65 and older — including rent, groceries and healthcare — stand at around $4,345, according to the latest government data.
What happens when you run out of money in a retirement home? ›Essentially, how do you pay for a nursing home when money runs out? In a lot of cases, the nursing home will dismiss or evict the non-paying resident. Moving an elderly family member out of a nursing home, especially if they need specialized care, can be very traumatizing for the patient.
How much cash should you have in the bank when you retire? ›Emergency Funds for Retirees
Despite the ability to access retirement accounts, many experts recommend that retirees keep enough cash on hand to cover between six and twelve months of daily living expenses. Some even suggest keeping up to three years' worth of living expenses in cash.
Paying off your mortgage may not be in your best interest if: You have to withdraw money from tax-advantaged retirement plans such as your 403(b), 401(k) or IRA. This withdrawal would be considered a distribution by the IRS and could push you into a higher tax bracket.
What do most people use home equity for? ›Home equity can be used for more than renovating or fixing your home, including paying for college, consolidating debt and more. Home equity loans are pretty straightforward: You borrow money against the amount of equity you have in your home.
What is the downside of taking equity out of your home? ›The possibility of losing your house: “If you fail to pay your home equity loan, your financial institution could foreclose on your home,” says Sterling. The potential to owe more than it's worth: A home equity loan takes into account your property value today.
How do you turn home equity into cash? ›Home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing are the main ways to unlock home equity. Tapping your equity allows you to access needed funds without having to sell your home or take out a higher-interest personal loan.
What is the best option to use home equity? ›You can use your loan for consolidating debt, paying for medical expenses or financing a vacation. However, not all of these are the best uses for a home equity loan. Generally, it's best to use your home equity loan to add value to your home or improve your financial situation in other ways.
Can I take equity out of my house without refinancing? ›Home equity loans, HELOCs, and home equity investments are three ways you can take equity out of your home without refinancing.
What happens when you use equity in your home? ›
By leveraging the equity you build in your home, you'll be able to consolidate debt, pay for renovations or make updates that increase your home's property value in the long run. However, it's important that you explore your options and choose the right type of home equity financing for your needs.
Is home equity considered a financial asset? ›Home equity is an asset and is considered a portion of an individual's net worth. However, it is not a liquid asset.
Does being a millionaire include home equity? ›That's only one way to measure if someone's a millionaire, of course. A net worth of $1 million also qualifies; subtract liabilities, including mortgages and car loans, from assets, including home equity and retirement savings, to determine your net worth.
How much cash can I take out of my home equity? ›Home Equity Loan
You can borrow 80 to 85 percent of your home's appraised value, minus what you owe. Closing costs for a home equity loan typically run 2 to 5 percent of the loan amount—that's $5,000 to $12,000 on a $250,000 loan.
Why use home equity? Tapping your home equity can be a convenient, low-cost way to borrow large sums at favorable interest rates to pay for home repairs or debt consolidation. However, the right type of loan depends on your needs and what you plan to use the money for.
At what age is 401k withdrawal tax free? ›You can begin withdrawing money from your traditional 401(k) without penalty when you turn age 59½. The rate at which your distributions are taxed will depend on what federal tax bracket you fall in at the time of your qualified withdrawal.
What is a good 401k balance at age 60? ›By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary. So, for example, if you're earning $75,000 per year, you should have $750,000 saved.
How much should a 65 year old have in savings? ›The suggested savings guidelines say you need about ten times your annual salary in savings as you reach your full retirement age. The median salary of a 65-year-old is $54,000 per year — which means you'd need approximately $540,000 saved if you want to retire at 65.
Does money in the bank affect Social Security retirement benefits? ›Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits.
What is the lowest Social Security payment? ›For 2021, the minimum earnings threshold was $15,930, and it increased to $16,380 in 2022. For 2022, a worker with 11 years of coverage receives a special minimum Social Security benefit of $45.50 per month, while a worker with 30 years of coverage gets a special minimum benefit of $950.80 per month.
What is the highest Social Security monthly payment? ›
The maximum benefit depends on the age you retire. For example, if you retire at full retirement age in 2023, your maximum benefit would be $3,627. However, if you retire at age 62 in 2023, your maximum benefit would be $2,572. If you retire at age 70 in 2023, your maximum benefit would be $4,555.
What is the biggest expense in retirement? ›Housing expenses—which include mortgage, rent, property tax, insurance, maintenance and repair costs—remained the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs, representing over 35% of annual expenditures.
How much do most retirees live on? ›Average Retirement Income in 2021. According to U.S. Census Bureau data, the median average retirement income for retirees 65 and older is $47,357. The average mean retirement income is $73,228.
What is the 4 retirement rule? ›What is the 4% rule for retirement? The 4% rule states that you should be able to comfortably live off of 4% of your money in investments in your first year of retirement, then slightly increase or decrease that amount to account for inflation each subsequent year.
Is primary home equity a good asset for retirement? ›Home equity can help you invest for retirement because there are various ways that you can use it to raise cash. This cash can then be saved or invested in a variety of ways. Although many options are available, what works best will depend on your personal financial situation, goals, and risk tolerance.
How do I convert home equity to cash? ›Home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing are the main ways to unlock home equity. Tapping your equity allows you to access needed funds without having to sell your home or take out a higher-interest personal loan.
What should I do with all the equity in my home? ›- Paying off credit card bills. ...
- Consolidating other debts. ...
- Home improvements. ...
- Home additions. ...
- Down payment for an investment property. ...
- Starting a business. ...
- Emergencies.
If they are in a lower tax bracket now than at age 65 or after age 71, they should draw more money from their RRSP. If they are in a higher tax bracket now than what they will be in later, they should defer drawing money from their RRSP and withdraw from their tax paid account or their TFSA.
What assets should you spend first in retirement? ›Withdraw funds from taxable investment accounts first to take advantage of lower (dividend and capital gains) tax rates. Next, take funds from tax-free investment accounts, followed by tax-deferred accounts such as 401(k)s, 403(b)s, and traditional IRAs.
What is a good amount of home equity? ›What is a good amount of equity in a house? It's advisable to keep at least 20% of your equity in your home, as this is a requirement to access a range of refinancing options. 7 Borrowers generally must have at least 20% equity in their homes to be eligible for a cash-out refinance or loan, for example.
Can I take cash-out of my equity without refinancing? ›
Home equity loans, HELOCs, and home equity investments are three ways you can take equity out of your home without refinancing.
What happens when you cash-out your equity? ›A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.
Can I cash-out all of my equity? ›Both these loans use your home as collateral, which means you can get lower interest rates for cash-out refinances and home equity loans than other types of loans. You usually can't take 100% equity from your home. Most lenders and loan types require borrowers to leave some equity in the home.
What do most homeowners use the equity in their home for? ›Home improvements
Home improvement is one of the most common reasons homeowners take out home equity loans or HELOCs. Besides making a home more comfortable for you, upgrades could raise the home's value and draw more interest from prospective buyers when you sell it later on.
One of the major benefits of a HELOC is its flexibility. Like a home equity loan, a HELOC can be used for anything you want. However, it's best-suited for long-term, ongoing expenses like home renovations, medical bills or even college tuition.