About 80% of Americans age 60 and older own property, and housing wealth accounts for about 48% of this group’s median wealth. As retirees near major cities and strong real estate markets begin to retire, they realize they can unlock that wealth by selling their homes and moving to more affordable areas. This retirement and relocation strategy allowed homeowners to get a median of $99,019 for their home in 2019, with that amount rising to $347,000 for the top 10% of homeowners who moved to a less expensive housing market. Here’s how it works and the pros and cons of relying on this retirement strategy.
Consider working with a financial advisor to help you meet your retirement needs.
How retirees can gain housing wealth by relocating
When retirees are done working, they no longer need to stay near big cities like New York, Boston, or Los Angeles. Instead, they are considering moving to affordable, more retirement-focused states like Florida or Wyoming. Not only does this provide them with a community of retirees in which to socialize, but it also frees up a significant portion of their wealth through the sale of their homes.
Vanguard Group recently conducted an analysis of this group to determine how much money retirees could free up by selling and relocating. As of 2019, the median homeowner aged 60 and older who used this technology gained about $99,000 in home equity. The median unlocked amount in the top 10 percentile was $337,000.
The average homeowner over the age of 60 has about $223,000 in retirement savings in their financial accounts. This alone is not enough for retirement, as many people are beginning to plan to use their home equity as part of their retirement plan.
The example provided by Vanguard involves a woman who purchased a home near Boston in the 1990s for $170,000. The home is now worth about $500,000. After selling her home, moving and buying a smaller home in a new location, she could make about $200,000 in capital gains from the sale of her home.
The key to freeing up those funds was that she had to move to a place with a cheaper housing market so she didn’t have to pay rent. For some people who have family obligations that require them to stay in their current location, this may not be an option. However, for many people, this quickly becomes a way to nearly double their retirement savings.
There are two types of retirement settlers who can be successful with this strategy. The first category is those who move from a booming housing market (lottery winners) and those who move to a low-growth housing market (the bargain hunters). Each strategy creates different value for homeowners, but also presents different opportunities.
1. Lottery winner
“Lottery winners” are those who leave a booming housing market at the right time. When they own a home, they are able to see strong growth in home values in their area over a long period of time. They hit the market at the right time and are able to create a lot of home equity simply by being in the right place at the right time.
Some homeowners may have predicted a housing explosion like this, but in reality, most people just happened to get lucky during the housing boom in their area, hence the lottery-related names. Because home equity has grown significantly, this group can often move into almost any market that doesn’t have similar growth patterns and ultimately free up a lot of money for retirement.
2. Bargainer
Many people fall into the second category, called “bargain hunters,” which means they have to do more work to unlock their equity. This group typically sees a steady increase in the value of their home while they own a home, rather than seeing a pattern of large increases over several years. This means they have to be more creative in order to free up some wealth from home.
The strategy here is to find a bargain on the real estate market somewhere in the country, allowing them to buy a new home for far less than what they would pay to sell their existing home. This may not unlock the same ideal retirement location, but it’s still a viable way to significantly increase the amount of money they have saved for retirement.
The Pros and Cons of Relying on Relocation for Retirement Income
retirement and relocation
Freeing up money by selling your home and moving is beneficial for most people, but there are pros and cons of actually relying on that money for retirement. When you’re planning for retirement early, it’s important to understand both sides of the situation so you can make the right choice before it’s too late.
advantage
More money: By relying on and executing this strategy, you can add a sizeable percentage to your retirement fund.
You can retire in paradise: One option for this strategy is to retire somewhere sunny in the United States or even move overseas to a tropical paradise with a lower cost of living.
More accurate planning: Rely on this strategy to get a more accurate picture of your retirement funds so you can better plan for your income in retirement.
shortcoming
The market may undergo unexpected changes: The real estate market in your current area may change over time. This could result in potential returns and retirement savings being lower than you expected. The real estate market can be more unpredictable than the stock market over time.
Less liquid: If a large portion of your retirement is tied to real assets, you won’t be able to withdraw that money at any time. It also leaves you at the mercy of the market until you actually close on the sale of your home.
Need to relocate: In order for this strategy to work, you must move when you sell your home. For many people with family or health conditions beyond their control, this may not be their wish or even their choice.
A financial advisor can help you anticipate various scenarios and weigh your options. Consider a free matching fiduciary advisor.
More and more homeowners are relying on retirement and relocation strategies to significantly strengthen their retirement financial situation. By selling their home in a strong housing market and moving to a weaker housing market, retiring homeowners can net the difference and add it to their retirement funds.
This is not without risk, however, as markets can change. For many people, it can help increase their total income in retirement, but it’s better to think of it as additional income than as money you need for the retirement you want.
Retirement Tips
When considering your retirement options, it’s best to consult a professional. A financial advisor can help you plan for retirement and help you create an income stream for your golden years. Finding a financial advisor isn’t difficult. SmartAsset’s free tools You are matched with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goalsstart now.
When you’re thinking about retirement, it’s a good idea to know how much money you need to live the life you want. Try using SmartAsset’s free retirement calculator to do just that.
Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid—held in an account that is not at risk of large swings like the stock market. The trade-off is that the value of liquid cash may be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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