As you approach age 65, the balance of your net worth shifts from accumulating assets to using them to fund your retirement. While a paid-off home is a significant asset, having too much of your net worth concentrated in real estate can pose liquidity risks. Many financial planners and forums, like Bogleheads, suggest that keeping home equity below 40% of your total net worth is a prudent strategy. This provides enough liquidity and portfolio diversification to weather market downturns without having to sell your primary residence.
The Challenge of Having Too Much Wealth in Your Home
A large portion of your net worth tied up in a home can make you "house-rich, cash-poor". This situation presents a problem because your home's equity is not a liquid asset. You cannot sell a portion of your house to cover a medical emergency or pay for daily expenses. While a high home value might look good on paper, it doesn't directly contribute to your retirement cash flow. This can force retirees to tap into their investment portfolios at inopportune times, such as during a market downturn, a risk known as "sequence of returns risk".
Conversely, a lower percentage of net worth in a home means more of your wealth is in potentially income-generating assets, like stocks and bonds. This provides greater flexibility and a more reliable income stream to fund your retirement lifestyle. A paid-off mortgage significantly reduces monthly expenses, but the home's value itself is not an income source without taking out a loan or selling the property.
Strategies for Rebalancing Your Net Worth
If you find yourself with too much of your net worth in your house at age 65, several strategies can help rebalance your assets. A popular option is to downsize, selling your large family home and purchasing a smaller, less expensive one, potentially mortgage-free. This unlocks significant equity that can be invested to generate retirement income. For those who wish to stay put, a reverse mortgage or Home Equity Line of Credit (HELOC) can convert home equity into cash, though these options have associated costs and risks.
Consider this breakdown of options:
- Downsizing: Sell your current home and buy a less expensive one. This provides a lump sum of cash to invest, diversifying your assets away from real estate.
- Home Equity Loan or HELOC: Take out a loan against your home's equity. This provides a cash lump sum or line of credit but requires monthly payments, which can be a burden on a fixed income.
- Reverse Mortgage: A loan for homeowners aged 62 or older that converts home equity into cash, with no required monthly payments. The loan is repaid when you move or pass away. This can impact the inheritance left to heirs.
Downsizing vs. Staying Put: A Comparison
| Feature | Downsizing | Staying Put (with Equity Loan) |
|---|---|---|
| Liquidity | High; converts illiquid equity into cash for investment. | Moderate; provides cash but adds another liability (loan). |
| Housing Costs | Lower; smaller home usually means lower taxes, insurance, and maintenance. | Potentially higher; regular loan payments are added to existing property costs. |
| Lifestyle Impact | Significant change; may mean moving away from a community or family. | Minimal change; allows you to remain in your familiar home. |
| Legacy | Cash released can be invested or used, impacting potential inheritance. | Equity is converted to debt, reducing the inheritance for heirs. |
| Transaction Costs | High; includes real estate commissions, moving expenses, and closing costs. | Varies by loan type and amount; includes fees, interest, and closing costs. |
The Importance of Personalizing Your Plan
The ideal percentage of your net worth in real estate at age 65 is not a one-size-fits-all number. Your personal situation dictates the right approach. Factors like your other income sources (pensions, Social Security), your comfort with risk, your investment portfolio size, and your emotional attachment to your home should all be considered. Some retirees may be perfectly fine with a higher percentage in their home if they have sufficient outside income to cover all living expenses. Others may prefer maximum liquidity and diversification, even if it means moving. A financial advisor can help you create a personalized plan that considers all these variables and aligns with your retirement goals.
Conclusion
While rules of thumb exist, there is no magic number for how much of your net worth should be in your house at age 65. Most experts recommend keeping the concentration below 40% to maintain financial flexibility and diversification, but the ultimate decision is deeply personal. Assessing your cash flow needs, evaluating your living expenses, and considering strategies like downsizing or leveraging home equity are vital steps. By thoughtfully balancing your real estate assets with your liquid investments, you can ensure a more secure and comfortable retirement, free from being house-rich but cash-poor.
