The Average Boomer Is Sitting on $130,000 They Can’t Easily Spend - Here’s What to Do About It

Was one of your retirement goals to own a home that appreciates substantially over the years? At the same time, does your monthly budget still hinge on Social Security, a pension, and whatever you have in your retirement accounts?

That's quite the disconnect. Your balance sheet looks better than your bank account.

It's also a common scenario. The National Institute on Retirement Security (NIRS) found that home equity represents about one-third of retirees' financial assets, or roughly $130,000, compared with about $40,000 in traditional retirement savings. Even more surprisingly, only 6% of the total income of retirees aged 65 comes from property and investments.

As such, the problem isn't necessarily that retirees don't have wealth. It's that much of that wealth is sitting in an asset that isn't naturally liquid.

Your home may be your biggest asset

Depending on perspective, a house could be many things simultaneously. It's a valuable asset, a place to live, a hedge against rising real estate costs, or a potential source of retirement funds. However, it's also an asset that's difficult to translate to cash without some fairly consequential actions.

For example, if you need $10,000 from an IRA, you don't have to downsize to get it. With a house, getting $10,000 generally means selling something, borrowing against it, or restructuring your housing situation.

Boomers are sitting on an enormous pile of real estate wealth

According to a Realtor.com analysis, Boomers own between $18 and $19 trillion of real estate. This staggering number highlights that a huge portion of this generation's wealth is concentrated in housing.

Since housing wealth isn't retirement income, this $19 trillion asset pool doesn't mean that Boomers have trillions to spend. Much of their wealth is tied up in their homes, making many of them "asset-rich and income-poor." It's important to point out that it doesn't necessarily mean they're struggling financially. Yet, despite considerable wealth, they may still have an underwhelming monthly cash flow.

A paid-off home still costs money

Retirees who own their home outright have a significant advantage. A paid-off home eliminates mortgage payments.

Yet the house doesn't generate any income for the retirement budget. Besides, it still incurs property taxes, homeowners insurance, HOA fees, and repair, maintenance, and utility costs.

How to unlock equity

Your home might be worth hundreds of thousands of dollars, but you can't use that value to buy groceries or pay a medical bill without first converting some of the equity into cash.

Selling and downsizing

Selling a home and buying something cheaper is the cleanest way to convert some equity into cash without taking on new debt. If you sell for $600,000, pay off a $100,000 mortgage, then buy a $300,000 home, you could potentially emerge with a meaningful amount of cash.

However, everything from realtor commissions and paying off the existing mortgage to moving, repairs, and improvements before selling costs eat into that profit. Also, there's the human tradeoff of giving up a home, neighborhood, or community that may have been a part of your life for decades.

A reverse mortgage

A reverse mortgage allows eligible homeowners to convert some of their home equity into funds without having to sell the house. Depending on the product and circumstances, proceeds may be a lump sum, line of credit, or payments. There are no required monthly mortgage payments.

The tradeoffs aren't negligible. Interest and fees reduce remaining equity. The loan balance generally grows over time. The home is typically sold when the borrower dies or leaves the home. They're still responsible for property taxes, insurance, and maintenance.

The question to ask before considering a reverse mortgage is: Does converting part of your home equity into retirement income solve a problem that's worth the costs and reduction in future equity?

A HELOC or home equity loan

A home equity line of credit (HELOC) or a home equity loan lets you use equity while staying in your home. It's attractive if you need a relatively short-term source of funds or want flexibility, but only if your income supports the resulting debt.

Home-equity loans generally provide a fixed amount with a scheduled repayment. HELOCs may offer variable rates and changing payments, which are riskier.

Still, these tools only let you borrow against your house. This strategy makes sense when you have a clear repayment plan. If borrowing simply plugs a recurring income shortfall, it could prove disastrous in the long term because it further depletes your savings.

Staying away from home equity entirely

Finally, you don't have to tap into your home equity at all. It doesn't have to become retirement income.

If you already have enough income, want to preserve the house for your kids, don't want additional debt, expect to remain in the home permanently, or hate the hassle and costs of moving, leave the house untouched.

After all, living mortgage-free in a home has an enormous advantage over paying $2,000 a month in rent. The home isn't generating income, but it's reducing the income you need.

Bottom line

The NIRS numbers above tell a striking story. Retirees have substantially more wealth tied up in their homes than they have in traditional retirement savings. Unfortunately, that doesn't automatically translate into a bigger monthly budget.

While home equity is valuable, your goal is to decide what role it plays in your overall financial fitness. Your home doesn't have to generate a monthly paycheck to be an important part of your retirement plan. Yet if you're counting its value toward your financial security, you should understand how that value could be used if you ever need it.

This article is for informational purposes only and should not be considered investment advice.

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Author Details

Roxana Loomes

Roxana Loomes has written more than 110 articles for FinanceBuzz, where she helps readers stretch every dollar through savvy shopping and strategic spending. You'll find her sharing budget-friendly finds at Target, Costco, and Sam's Club, and pointing readers toward small towns where retirees can live well on just $40,000 a year.