Your House as a Retirement Strategy: Tips and Insights
6 minute read
February 17, 2017


While you’re living in your home and enjoying the benefits of the shelter that it provides, as well as the equity buildup it generates, you should also consider that your house is one of your best retirement strategies. Even though it isn’t a “retirement plan” in any formal sense, it’s nonetheless an important leg of a multi-faceted retirement strategy, and perhaps even the most important.

[content_block id=18122 slug=home-equity-cta]

How can your house help you to retire?

Having a Mortgage-Free Home

When considering your house in regards to retirement, paying down or paying off the mortgage always opens up options. The more that you can pay down your mortgage, the more equity you have in the home. That equity can serve you in retirement in a number of ways.

But if you can pay off your mortgage completely sometime before you retire, you will have a mortgage free home to live in during retirement. Since housing is typically the single biggest expense that most households have, paying off your mortgage could cut that expense significantly.

Let’s say that your total house payment is $1,500 per month. Principal and interest represent $1,000 per month, while taxes and insurance are the other $500. By paying off your mortgage, the principal and interest portion disappear. That means your basic house payment will drop to just $500 per month.

There aren’t many places you can live for $500 per month! Think about the benefit that you’ll have in retirement.

[content_block id=18122 slug=home-equity-cta]

There’s another potential advantage here too, and it can be huge. If you can pay your mortgage off several years before you retire, that will give you extra room your budget so that you can contribute more money to your retirement savings.

In planning your retirement, you should give serious consideration to paying off your home as soon as possible.

[content_block id=18122 slug=home-equity-cta]

Selling the Home to Raise Additional Retirement Capital

Whether or not you pay off your mortgage, if you have a large equity position in your home, you can sell it just before retiring, and then use the proceeds for your retirement.

This is an especially good strategy if you’re entering retirement with slim retirement savings.

You won’t be able to put the sales proceeds into a dedicated retirement plan, like an IRA or 401(k) of course. But you can put the money into a regular investment brokerage account or mutual funds, to provide you with an additional income in retirement.

Also, since the proceeds will be held in a regular taxable account, you won’t have to be concerned with paying income tax on your withdrawals, the way you will with regular retirement accounts. That’s actually a smart retirement tax diversification strategy.

Downgrading to a Less Expensive Home

If you have a large equity position in your home, and especially if the mortgage is completely paid off, you will always have the option to trade down to a less expensive living arrangement when you retire.

For example, let’s say that you have a $300,000 house and the mortgage will be completely paid off by retire. You can sell the property and then move to a house in a less expensive area for, say, $150,000.

This can be an especially effective strategy if you currently live in an area that has very high real estate taxes. It may be possible to move to an area where both property values and real estate taxes are considerably lower.

[content_block id=18122 slug=home-equity-cta]

And in the example given above, not only will you lower your housing expense by trading down, but you will also free up an extra $150,000 for additional retirement savings.

Worried about the tax consequences of selling your home? Don’t be…

Tax-Sheltered Savings – Even Better than an IRA

You know how retirement plans are tax-sheltered? Your house is too! And in fact, it may be an even better tax deal than retirement plans.

With retirement plans, your contributions are generally tax-deductible when made, and the investment income on them accumulates on a tax-deferred basis. But the key part of that description is tax-deferred. Tax-deferred does not mean tax-free. It means that you will have to pay tax on your retirement money when it is withdrawn from your plan.

Now let’s look at the tax benefit of a house as a retirement asset.

When you sell your home, you can take a tax exemption of up to $250,000 – or up to $500,000 if you’re married – on the gain on the sale the property.

The operative word here is tax exemption. That means no tax is due on that amount – ever.

Now it’s important to remember that the exemption applies only to the gain on sale. If you’re married, and 30 years ago you purchased your home for $100,000, but plan to sell it just before retirement for $600,000, there will be no tax due on the transaction.

[content_block id=18122 slug=home-equity-cta]

That’s because the first $100,000 of the sale represents what you paid for the property – that’s your cost basis according to the IRS. The $500,000 that represents the gain on sale will be exempt from income tax. $600,000 in proceeds – no tax – got it?

Renting Out the Property for an Additional Income

This can be a solid retirement strategy if your house is located in an area where rents are high.

Let’s say that you decide that you are going to move to a different, less expensive location. Your current home is worth $300,000, you own it mortgage free, and it has a rent value of $2,000 per month.

If the property taxes and homeowners insurance on the house are $500 per month, renting it out will produce a $1,500 per month profit to you. That comes to $18,000 per year, which represents a 6% annual return on your $300,000 investment in the home. That’s a pretty solid, relatively low-risk return in today’s interest rate environment, wouldn’t you agree?

If the cost of housing in your new location is less than $1,500 per month, then your current home will continue to pay your housing expense in your retirement home.

So while you’re preparing for retirement, and doing your best to fund your retirement plan and get out of debt, don’t forget to build up equity in your home. The sooner that you can pay down or pay off your mortgage, the more options you will have in retirement.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.

Share on LinkedIn
Email this Article
Print this Article

More on Career Planning Expert Advice from MyPerfectMortgage