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Is Moving Your Retirement Solution?

If real estate in your area is hot, move to where it’s not

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A secure retirement requires a sizable nest egg. The problem? Most people don’t have enough cash socked away. The bear market on Wall Street has eviscerated many retirement savings accounts. The average balance in 401(k)s and IRAs declined more than 20 percent last year, according to Fidelity Investments. Fifty-three percent of baby boomers say they’re behind in their savings and 51 percent of Americans retire with less than half of their preretirement income, according to Goldman Sachs Asset Management.​

But there’s an often-overlooked asset that preretirees and retirees can tap to fund the retirement savings gap: the house they live in. About 8 of 10 Americans 60 or older are homeowners, and housing wealth accounts for about half (48%) of this age group’s median net worth, according to the Vanguard Group. Thanks to booming real estate prices in recent years, it’s not a stretch to start viewing your home as a 401(H)ouse retirement account.​

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Money under the floorboards

A recent research report from Vanguard titled “Home is where retirement funding is” says getting additional funding from your home “could be mission-critical to a secure retirement.”

The Vanguard analysis goes beyond the typical notion of downsizing from, say, a 3,000-square-foot home to a house or condo half the size to save money. Or tapping home equity via a reverse mortgage or home equity line of credit (HELOC) to help make ends meet.

Instead, Vanguard focuses on extracting equity by selling your home and relocating to a cheaper housing market. Its research shows that the typical migrating retiree 60 or older who sold their home and moved to a less expensive real estate market by crossing county lines or state borders extracted about $100,000 in home equity, representing 44 percent of a new home’s value. The median equity unlocked climbs to $346,699 for homeowners in the top 10th percentile who sell properties in the most expensive real estate markets and move to cheaper locales.​

Vanguard provides a hypothetical example of how executing this strategy can shore up your retirement funding: Let’s say a 30-year-old homeowner bought her primary home in Boston for $170,000 in the early 1990s. The home, which enjoyed appreciation above the national average, would now be valued about $500,000. In her 60s and after a move to Florida, she can own a property outright and unlock about $200,000 of equity from her Boston home and add it to her retirement savings fund.​

Vanguard says its research shows that housing wealth should not be considered off-limits when mapping out a retirement plan.

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“It’s a big deal,” said Kevin Khang, Ph.D., a coauthor of the Vanguard study. “It plays a very big role — and in some cases the only role — in people’s ability to have a secure retirement.”

Since many people often move to a new home near retirement, either to enjoy a warmer climate, cultural opportunities or a breathtaking water or mountain view, it makes financial sense to at least consider a “retire-and-relocate” financial option.​

Are you a winner?

The biggest beneficiaries of this real-estate-focused retirement funding strategy are what Vanguard dubs “lottery winners.” Those are folks who move from a booming, white-hot housing market to a cheaper, low-growth market. Just like maximizing a stock investment by selling at “the top,” this strategy unlocks the most equity when homeowners in expensive markets sell when sellers hold the upper hand over buyers. “Bargain hunters” can execute this strategy by selling and packing up and heading to a more distressed real market.​

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The financial benefits of such a move are many, says Jamie Cox, financial adviser and managing partner at Harris Financial Group. ​

  • A narrower retirement funding gap: Freeing up potentially hundreds of thousands of dollars in home equity enables you to fortify your nest egg and boost your chances of having enough money to live on throughout retirement. “It solves for the underfunding of retirement,” Cox said. “It also makes retirement safer.”​
  • Improved monthly cash flow: “Retirement is all about cash flow,” Cox said. You need to have enough money to pay all your monthly bills in retirement. Often the biggest drag on cash flow each month is your mortgage payment, especially if you’re on a fixed income. “So the simple act of moving from a high-price area to a low-price area could remove your mortgage payment altogether,” Cox said. And that will save you a bundle. The average monthly mortgage payment in 2021 was $1,427, according to the U.S. Census Bureau’s American Housing Survey. Moving to a cheaper real estate market may also save you money on property taxes and other living expenses.​
  • A tax-free transaction: For most homeowners, the profits on the sale of their home (if the gains total less than $250,000 if you’re single, or $500,000 if you file taxes jointly with your spouse) will be tax-free. In contrast, dividends earned on stocks or capital gains on equities owned less than a year will be taxed at ordinary income tax rates which in 2023 range from 12 percent to 37 percent for couples who file joint tax returns, according to the IRS. Sales of stocks held for a year or more will incur capital gains taxes that can climb as high as 20 percent. Most people “can liquefy one of their largest assets tax-free, which is one of the very few assets that can do that,” Cox said. “That’s a huge benefit to the average family.”​
  • Replenished retirement savings: Another plus is potentially having money left over to deposit into a savings account after selling a high-priced home in one state and buying a cheaper one in another state. It’s akin to getting a lump-sum injection into your nest egg, Cox said.​
  • Delayed Social Security: Having more cash at your disposal to make ends meet can provide you with the option of taking Social Security later than your official retirement age. And that puts more money in your pocket, Cox said. According to the Social Security Administration (SSA), “if you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase. If you start receiving benefits early, your benefits are reduced a small percent for each month before your full retirement age.”​

All these pluses may help you avoid alternatives such as going back to work, spending less and downsizing your lifestyle, or figuring out how to magically come up with a big chunk of money out of thin air.​

Trading down to a cheaper housing market can be a financial win-win.​ Still, before making this decision, be sure to weigh so-called qualitative factors, such as how you feel about leaving a home that you raised your kids in, a place that is home to your social network and friends and relatives, and where you’re connected to the community, says Matt Fleming, a wealth adviser executive at Vanguard Personal Advisor Services. Don’t ignore the personal impact of selling your home and moving to a cheaper one far away. “This decision shouldn’t be made in isolation of some of these other qualitative, rather than quantitative, factors,” Fleming said.​

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