What role should your house have in retirement planning?

Home is where the heart is. And it can also be where the assets are. As of 2011, home equity made up about three-quarters of the average American’s net worth, according to the U.S. Census Bureau. Despite this high figure, the home doesn’t always factor into retirement planning calculations.

For clients with ample assets, home equity is a less pressing issue. In that case, there’s no reason to “concern yourself with the house,” said David Imhoff, CPA/PFS, owner of Cornerstone Wealth Advisors LLC in Overland Park, Kan., because “we look at the house as the asset of last resort.”

But retirees of more modest means may need every possible option, including home equity. “It’s really surprising that more people don’t pay attention to it,” said Geoff Sanzenbacher, Ph.D., research economist at the Center for Retirement Research at Boston College. “The house can be a potential source of wealth.”

Yet, according to a 2016 Urban Institute survey, only 6% of older Americans are interested in tapping their home equity.

Including housing wealth—and sometimes the debt that accompanies it—during retirement planning can show clients a more realistic view of their retirement possibilities. At the very least, it can help them envision what their housing situation might look like and changes they need to make.

Our experts weigh in on the role that home equity plays in retirement planning decisions.

No longer ‘free and clear’

Perhaps the first decision retirees need to make is whether to carry a mortgage. It used to be a given that a mortgage would be paid off by retirement, but that’s less true today. Between 1998 and 2012, the proportion of seniors carrying a mortgage rose from 23.9% to 35%, according to Fannie Mae. Not only are more retirees carrying a mortgage, but they also owe more than in the past. According to a report from the Center for Retirement Research, using data from the Federal Reserve’s Survey of Consumer Finances, from 2001 to 2013, the housing debt-to-income ratio rose by 52 percentage points for Americans 55 and older, while it grew by a much lower rate for younger households.

“Practically, that means they need more money for retirement, and they have to do something more than what they’ve been doing to this point,” Sanzenbacher said. Some retirees should consider downsizing as a way to reduce housing expenses, Sanzenbacher said. Others might want to postpone retirement so they can make more headway on their mortgage, he advised.

Despite the trends, paying off the mortgage remains a pressing goal for many, said Lori Luck, CPA/PFS, president/shareholder at CLS Financial Advisors in Portland, Ore. That’s what many of her clients aim to do, depending on the magnitude of the mortgage and the mortgage interest rate. They may consider accelerating paying off the mortgage at or near retirement to avoid the emotional pain of a future fixed housing payment, if they can use investment funds that don’t trigger adverse income tax consequences and can otherwise meet their retirement goals.

Even clients who have the cash flow to continue mortgage payments have an aversion to debt in retirement, CPAs said. “People can’t imagine not going to work every day and getting paid while they still have this debt to pay off,” said Kelley Long, CPA/PFS, a resident financial planner with Financial Finesse in Chicago.

However, CPAs are quick to point out that paying off the mortgage isn’t always a positive in retirement—as long as retirees have the cash flow to support the payments.

“Does it make sense to pay off a mortgage with 3% or 4% interest versus taking money out of your portfolio that could be earning more?” asked Nate Wenner, CPA/PFS, who is a principal and regional director with Wipfli Hewins Investment Advisors LLC in Minneapolis. On top of that, withdrawals from retirement or investment portfolios could generate taxes, Wenner cautioned (while mortgage interest and home-equity loan interest payments are often tax-deductible).

Considering the options

Even without a mortgage, housing continues to be a big-ticket item on many retirees’ balance sheets. “Everyone needs a place to live,” Wenner said. “So I don’t necessarily look at someone’s home or home equity as an investment asset.”

For retirees looking to extract home equity, the most straightforward approach is downsizing; that is, trading a sprawling family home for smaller digs better suited to an empty nest. Boston College’s Center for Retirement Research attempted to quantify how much cost savings retirees could realize through downsizing. The center estimated that homes cost 3.25% of their value to maintain each year. So moving from a home valued at $250,000 to one that costs $150,000 should save retirees $3,250 a year. In addition, the center calculates that retirees could generate an additional $3,000 a year in earnings if they invest the difference in instruments that earn an annual 4% return (minus $25,000 for real estate commissions and moving costs).

But what may make financial sense doesn’t always square with retirees’ emotions. “People really want to age in place, and a lot of people have the idea of leaving their house to their kids, which gets in the way of downsizing,” Sanzenbacher said. What’s more, many retirees may be willing to downsize their space but not necessarily their lifestyles, Wenner said.

“If you move from a $500,000 home in the suburbs to a $500,000 condo downtown, that’s not going to save you much,” he said. And some retirees end up in even bigger homes than before. While half of retirees who move find smaller homes, 30% actually increase their living space, according to research from Merrill Lynch and Age Wave.

Unconventional uses of home equity

For retirees who are adamant about staying put, another option is a reverse mortgage. This type of loan allows those 62 and older to draw on equity from the home and repay it only when they move, sell, or die. To qualify, retirees must have substantial equity or no mortgage. They must also have the financial wherewithal to maintain the property.

High fees and sometimes deceptive lending practices have led some CPAs to shun these products. However, some CPAs have started to take a second look in recent years for certain clients in certain circumstances thanks to new consumer protections put in place by the Consumer Financial Protection Bureau (CFPB), said Long, who recommends reverse mortgages for some clients. President Donald Trump’s administration has voiced opposition to the CFPB and its director, causing those who support the agency to worry that those protections may be undone.

In the meantime, Long believes reverse mortgages can be used for retirees who need additional assets, but only after other options have been exhausted.

Others suggest obtaining a type of federally insured reverse mortgage known as a home-equity-conversion mortgage (HECM) line of credit before a cash flow situation becomes dire. If retirees don’t tap the line of credit, it can continue to grow. In an article in the Journal of Financial Planning, authors John Salter, Shaun Pfeiffer, and Harold Evensky recommend keeping a standby line of credit to access only when significant portfolio declines would force retirees to sell depreciated assets at an inopportune time. The move can significantly reduce portfolio risk, the authors argue.

Sanzenbacher pointed to another strategy: property tax deferral. These programs are available to seniors below certain income thresholds in some states, including Massachusetts, Minnesota, and Washington. Under the programs, seniors who qualify can cap how much they pay each year in property taxes. The deferred taxes must be repaid, with interest, but only after the home is sold.

Given the precarious financial situation of many retirees, giving full consideration to the role of home equity adds a potential valuable option to the retiree tool box.

Ilana Polyak is a freelance writer based in Northampton, Mass. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.