How Americans are using their homes to finance retirement

Data: Vanguard; Note: Average difference in value between the house being sold and the house being bought, expressed as a percentage of the value of the house being bought; Chart: Tory Lysik/Axios Visuals

As Americans retire, they often move from expensive areas to cheaper ones. It frees up equity in the home that can rival or even exceed retirement funds in 401(k) plans and the like.

Why it’s important: People still need a place to live in retirement and rarely take advantage of reverse mortgages to get cash out of their homes. However, moving somewhere cheaper is much more common.

Be smart: The people who buy in expensive cities and states are the younger generations who want to live near good schools or high-paying employers. The cash they borrow in the mortgage market is turned into retirement money for older Americans.

By the numbers: About 80% of Americans over age 60 are homeowners, according to a new Vanguard report titled “Home Is Where Retirement Funding Is.”

  • By moving, the median American over 60 can unlock about $100,000 in home equity — and even more if they downsize at the same time. That’s a meaningful sum considering the same average American retiree has about $223,000 in financial retirement accounts.

Where it says: About 25% of American retirees sell their homes and move to a cheaper place over a given 10-year period, according to Vanguard’s Kevin Khang, one of the authors of the report.

  • It not only frees up cash; it also reduces their daily living expenses.

How it works: Let’s say a homeowner sells their house in Denver for $600,000 and moves to a house of the same size in Florida that costs $400,000. That means she pays $200,000 – 50% of the value of the new home.

  • In fact, in 2019 this ratio averaged 73% in Colorado, up from just 12% in 2007.

  • “Given what happened to home values ​​in Colorado during the pandemic, it’s very likely that number is even higher now,” says Khang.
  • Other states with plenty of payout potential include California (77%) and Hawaii (116%). It is important that the payout figures include moves within the state, not just moves to a completely different state.

The bottom line: High housing prices are not the reason younger Americans are moving to expensive cities and suburbs. But “when you retire, you’re hypersensitive to retirement resources,” says Khang.

  • For older people who moved to expensive neighborhoods when they were younger, those resources often include their homes—which can prove to be a source of significant liquidity.

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