If you're counting on your house to finance your retirement, you may be walking into a trap

  • By Reshma Kapadia,
  • Barron's
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Downsizing is a common feature of retirement planning. But two trends could throw a wrench into that: First, more older Americans are carrying debt, typically mortgages, into retirement. Exacerbating this are housing trends that could pose a problem for baby boomers looking to sell large, suburban homes to pay off their mortgage and shore up retirement savings.

Baby boomers are clearly more comfortable holding debt than the prior generation, which sought to pay everything off before retiring, says J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin. About 70% of 65- to 74-year-olds held some debt in 2016, up from 52% in 1998; among those 75 or older, almost half had debt, double the ’98 level, according to the Employee Benefit Research Institute.

Historically low interest rates over the past decade has made borrowing less painful, of course—and even savvy, given the returns delivered by the decadelong bull market in U.S. stocks. But challenges could be ahead. “Higher fixed payments in the early part of retirement to cover the mortgage create added strain if there is a portfolio downturn,” says Wade Pfau, director of retirement research at Mclean Asset Management.

And those banking on selling their home to pay off their mortgage or home-equity line of credit, and using the remainder to boost their retirement savings, could also run into trouble. Already, there are signs that McMansions might not sell as quickly as before and that the allure of a big home in a good school district might not be as appealing to home buyers who are having children later, if at all. The share of home purchasers with children slid from more than half in 1987 to about a third in 2018, according to research by Arthur Nelson, professor of planning and real estate development at the University of Arizona.

From now until 2040, nearly 30 million boomer households will want to sell their homes—the majority of which are in the kinds of suburbs that may not appeal to millennials and the next generation, Nelson says. Only a fifth of U.S. homes are in the kind of walkable, mixed-use neighborhood that, surveys show, these home buyers prefer, he adds. Based on preliminary research, Nelson estimates that, after factoring in inflation, about 10 million of those households could end up selling their dwellings for less than they paid for them—and those in slow-growing or declining cities could struggle to find a buyer. Already, the rise in national home prices is at its slowest pace since April 2015, according to the S&P CoreLogic Case-Shiller U.S. National Home Price index.

That could be problematic for anyone planning to pay off a mortgage or Heloc with a tidy profit from a home sale. “Many people got carried away with thinking of their homes as an asset on their balance sheet they could tap as readily as their liquid investment holdings. Unfortunately, it’s more complicated,” warns Christine Benz, director of personal finance at Morningstar. “Ideally, your retirement plan—and your investment portfolio—will have enough flexibility so that you won’t be stuck if home prices don’t break your way.”

Financial advisors say that retirees with mortgages at rates of 3.5% or below might want to hang on to the loans. But for those with debt, and without cash elsewhere to pay it off, financial planners recommend a slightly more conservative asset allocation, dialing down stocks to 50% of the portfolio, if it would otherwise have had a 60% allocation, or trying to cover the debt payment with a guaranteed source of income—such as a pension or income annuity.

Other options: use the pause in the Federal Reserve’s interest-rate hikes to pay off the debt—or sell the house before more boomers flood the market.

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