Five short years ago, many learned men and women warned Americans against thinking that rising home prices would eliminate or lessen the need for them to save for retirement. Institutions and advisers alike advised people against relying on the equity in their homes to finance their consumption needs in retirement.
Today, that's no longer the case. In fact, we now have almost the opposite situation. With home prices falling for nearly five years, many Americans must consider what to do with their homes should prices continue to collapse and the equity in their homes -- if they are still lucky enough to have any -- disappears completely.
Should they stay in place and wait it out? Or should they bail out now and downsize? If they stay, should they pay down their mortgage, if they have one? And if they have a home-equity loan, should they refinance that or, if possible, accelerate the payments on that debt? (Find the best home-equity rates at MSN Money.)
"As always, the answer to such questions is determined by the age, desires, financial situation and other characteristics of the owners," said Barney Walsh, a pension and retirement consultant with Morgan & Walsh.
Others agreed. "The answer is (that) it depends on the individual situation," said Nicholas Paleveda, an adjunct professor at the graduate tax program at Northeastern University. "If you have plenty of assets for retirement, there may be no reason to downsize. If you do not have sufficient assets for retirement, then selling your home to live in a smaller home may be appropriate."
And Gene Amromin, a senior financial economist in the financial markets group at the Federal Reserve Bank of Chicago, said, "It's hard to give general advice. It all depends on the rest of the financial portfolio and family characteristics of an individual."
So let's take a closer look at the options.
Aging in place
In years past, Americans planned to age in place and viewed the equity in their home as the break-in-case-of-emergency asset, the one asset they would use to pay for long-term care or nursing homes. Today, however, aging in place isn't the option it once was, especially given the possibility that the equity in one's home might be falling in value, while the cost of keeping a home -- real-estate taxes, property insurance premiums and utilities -- is rising.
"The vast majority of people are looking to age in place," said Kenn Tacchino, a professor at Widener University as well as the director of the New York Life Center for Retirement Income at the American College. Unfortunately, keeping a home a person used to raise his or her family "may not be the most cost-effective or accommodating place for retirement living," he said.
One option to consider if you plan to age in place is something that was commonplace years ago: multigenerational living. AARP and Pew Research Center recently reported that growth of multigenerational households has accelerated during the economic downturn. In fact, the number of households comprising multiple generations jumped to 7.1 million such households, or 6.1% of all U.S. households, in 2010, from 6.2 million intergenerational households, or 5.3% of households, in 2008, according to AARP. By contrast, in 2000, there were 5 million households composed of multiple generations, which represented 4.8% of all households.
In essence, a multigenerational household could be one means of aging in place while reducing the cost of maintaining a home.
Pay down the mortgage?
If you plan to age in place, you have the assets and your house is not "underwater," Tacchino said, a good case can be made for paying down one's mortgage before retirement. "Retirement-income planning requires that a person establish an income stream that can provide for 'basic expenses' throughout a person's lifetime," he said. "One way to set the base is to minimize or eliminate monthly expenses like the mortgage. The issue then becomes: Is it more cost-effective to, for example, pay down the mortgage or buy an annuity or equivalent product?"
Ultimately, the answer depends on the mortgage's interest rate, annuity costs, liquidity concerns and any other relevant factors, he said.
For his part, Amromin said it is difficult to think of a scenario in which paying down the mortgage would be advantageous. "Assuming refinancing is an option, current low interest rates should allow for a cheap way of financing the remainder of the mortgage, potentially generate tax deductions and free up money for alternative investments," Amromin said.
Meanwhile, the Center for Retirement Research at Boston College published a study (.pdf file) in 2009 suggesting that all but a small minority of households are better off paying down their mortgages before entering retirement. In 2007, for instance, an increasing proportion of Americans were entering retirement with a mortgage. In fact, 41% of households aged 60 to 69 had a mortgage that year, and, at least at the time, 51% had sufficient assets to pay down their mortgage. "These households could, if they wanted, be mortgage-free simply by selling some of their investments and mailing a check to the lender," Anthony Webb, the study's author, wrote at the time.
