When the stock market collapsed two years ago, Grace Murphy's 401(k) savings collapsed along with it. But the Gainesville, Fla., school teacher, 53, still liked her odds of an early retirement. Thanks to Florida's robust housing market at the time, she envisioned eventually tapping into her home equity to help make a fruitful retirement a reality.
"At that time, I really thought the real estate market down her would hold just fine," Murphy says. "I guess I was wrong about that."
As the U.S. economy continues to struggle, a sharp rebound in the housing market is still considered faint. That's forcing many Americans who were hoping to tap into their home equity as a way to get to retirement to change their plans.
Some are staring at the prospect of working three to five years longer to help reach their retirement goals. Others are likely to be forced to live on fixed incomes from pensions,401(k)s or IRAs, and Social Security until their homes recover some of their lost value.
"A lot of these people are looking at years before their homes are worth more than their mortgages," says Stefan Bruckmeier, a financial planner in Denver, Colo. "That means home equity won't be a reliable retirement option for years."
About one in six people with a mortgage now owe the bank more than their homes are worth, according to a report by Moody's. Most of them are property owners who purchased their homes within the past few years, or refinanced their properties and siphoned off too much equity.
Financial planners say Americans in this situation should consider exploring options other than relying on home equity as a back-up plan for retirement. Among the best options, experts say, are downsizing their homes, selling assets, postponing retirement by working longer and signing up for a reverse mortgage.
The first logical choice, experts say, is to downsize. Downsizing offers the financial benefit of lowering monthly mortgage payments, resulting in increased cash flow, reduced maintenance costs and lower utility bills. Downsizing could also lower your real estate taxes because of a lower estimation on a smaller home.
Better Retirement Options
In some cases, homeowners are opting for a new product, frequently called a shared-appreciation arrangement or equity release, which is gaining popularity among homeowners in or near retirement.
Under this plan, a homeowner agrees to give up part of a home's future appreciation in exchange for cash, typically 10 percent to 15 percent of the property's current value.
"Shared-appreciation agreements can make financial sense for some older adults," says Jeffery Gehtz, a real estate attorney in San Diego, Calif. "They offer some protection against the current turmoil in real estate markets, if a property's value has declined by the time the owner decides to sell it or terminate the contract."
During the early part of this decade, Americans used their home equity in ways that went largely unexplored by previous generations. As real estate values soared, so did the ability to tap a home's value to pay for college educations, cars, furniture and even things such as vacations and cell phones. No longer was a house primarily a home; rather, many saw their houses as ATMs.
"Some people considered their house's equity like an ATM that could be used to help pay for children's education costs, as well as other expenses," says Jim Holtzman, an adviser with Legend Financial Advisors Inc. of Pittsburgh, which manages about $300 million in assets. "It doesn't make any sense to base retirement on real estate."
A few years ago, Randy Klein, 63, thought he'd retire in "a couple of years," he says. But the value of his home in Cleveland has dropped about $40,000 since then, forcing him to drop plans to sell his three bedroom house and downsize, because the savings won't be substantial enough. He has also seen his 401(k) lose value.
Now Klein, a hardware store owner, says he will likely work into his early 70s to compensate. "I wouldn't have considered even thinking about this a year ago," he says.
Working longer is a growing trend.
The AARP reported in April that almost one in four people from age 45 to 54 planned to delay retirement, with one in five people ages 55 to 64 thinking the same.
Staying on the job has benefits besides a paycheck. Employment is often a requisite in qualifying for mortgage refinancing, a good option for those with equity and good credit because rates have fallen to historic lows.
By working later in life, pre-retirees also can consider putting off collecting Social Security, a strategy that could lead to higher monthly payouts once they start collecting.