Real estate can be a great asset for retirement planning. Last week, I explored a couple of ways you can supplement your retirement income using real estate, namely by owning rental property or investing in REITs. This week, I’d like to take a look at a few other ways you can use real estate to supplement your income by tapping into the equity you may have in the home you are living in right now.
For millions of Americans, the home they are living in right now is NOT the home they plan to live in once they retire. This was true for my parents. After living in the Chicagoland area for a number of years, they relocated to North Carolina, where they plan to live for the remainder of their lives.
If you don’t plan to live in your current home for the rest of your life and you don’t plan to keep it as rental property, then you may be a good candidate for downsizing. Whether you plan to move to another state or just another home, downsizing gives retirees access to home equity, often with little or no tax implications. For example, a couple that has lived in their current home for the last 2 years can exclude up to $500,000 in capital gain when they sell their home. If they sell a home they own free and clear for $300,000 and buy a condo or smaller home for $200,000, they now have access to $100,000 to help support their retirement lifestyle.
One thing you’ll want to consider is what to do with this windfall of cash. One option is to invest it for income. Another is to purchase an immediate annuity. According to ImmediateAnnuities.com, a 65-year-old couple investing $100,000 could draw a monthly income of around $470 a month for the rest of their lives. That could pay for a few rounds of golf or perhaps a trip or two a year.
Maybe you are planning to live in your current home for the rest of your life but you’d still like to tap into some of the equity. You could finance the home through a traditional mortgage or home-equity loan but that will obligate you to monthly payments until the loan is paid back. An alternative might be the reverse mortgage.
With a reverse mortgage, you get to tap into your home’s equity without having to sell your home or make monthly payments while living in it as your primary residence. Since you are technically borrowing against the equity, the income you receive is nontaxable, which makes this a tax-friendly source of retirement income. However, since you are not making repayments on the amount you borrow, the amount you owe grows, making the reverse mortgage an expensive way to tap into your home equity.
The loan will eventually have to be repaid, either when you move and no longer maintain the home as your primary residence or pass away. If you are single or you and your spouse are not concerned about leaving the home as part of your legacy, then perhaps you are a good candidate for this option. On the other hand, if you wish to see the homestead passed on to the next generation, this may not be the best choice for you.
As you can see, real estate can be a major part of your retirement income strategy. Start by learning more about the different options. You can then decide which ones make the most sense based on your goals and circumstances.