Your Home: A Retirement Backup, Not Your Main Savings Plan (And When to Consider It)

For many Americans, their home is their most valuable asset. According to the U.S. Census Bureau, median home equity rose nearly $48,000 between 2019 and 2022, bringing the median household net worth to $176,500. Meanwhile, the median U.S. household has $39,000 in financial assets, excluding home equity, such as investments, savings, and retirement accounts.

With homes holding so much wealth, it can help support your retirement, but it shouldn’t be your main plan to fund your golden years. WorkMoney has everything you need to make sure your home isn’t your only retirement plan, and what to do if it has to be.

Why Your Home Shouldn’t Be Your Only Plan

Your home can hold significant value, but remember that it’s illiquid. That means it’s not going to give you immediate cash in an emergency. If you face a major hospital bill, car repair, or home repair, you can’t take money out of your home to cover those costs.

Because it holds wealth, it’s important to keep your home as part of your retirement plan, just not your main source of retirement savings. You can turn it into a financial security blanket, keeping it on reserve to cover gaps in your retirement savings when the time comes.

Maximizing Your Home Equity Without Tapping into It

The longer you can hold off on tapping into your home equity, the more you protect what you've built. There are a few different ways you can help reduce what it costs to stay in your home and preserve its value over time, like: 

• Efficient upgrades. Energy-efficient upgrades can lower your utility bills. Through the 2025 tax year, homeowners can claim up to $1,200 a year for qualifying energy-efficient improvements — such as insulation, windows, and doors — plus up to $2,000 for heat pumps or water heaters.

• Property tax exemptions. While there’s no federal property tax exemption, many states offer some form of tax relief for homeowners who are 65 years of age or older. Keep in mind that many programs have income limits, demographic requirements, and application deadlines. According to the AARP Foundation, only about 8% of 9 million eligible seniors apply for property tax relief that they are legally entitled to.

• Home upgrades. Old roofs and inefficient HVAC systems can reduce your home's value. Stay on top of regular maintenance and upgrades so your home retains as much value as it can.

By reducing the cost to live in your home, you can preserve your home’s equity even longer, giving you more time to build out other savings.

How to Turn Your Home’s Equity into Retirement Income

There are a few ways you can turn your home’s equity into retirement income. There’s no one right way; the best way is the one that works best for you and your family.

Downsize

Selling your home and downsizing — buying a smaller, less-expensive home — is one of the quickest ways to convert that sale into retirement savings. Whether you’ve paid off your home or you’re still making payments, selling your home for profit means you can pocket the cash. 

If you profit from the sale, you may owe capital gains taxes — though many sellers qualify for a hefty exclusion — up to $250,000 for single filers, or $500,000 for married couples filing jointly. To be eligible, you need to have lived in your home for at least two of the last five years before the sale.

Sell and rent

Rather than buying a new home, you can sell your existing home and rent instead. You aren’t tied to putting a chunk of cash into a new home; you are free and clear to pay monthly rent instead. 

While you aren’t tied to an asset in the same way because you’re renting, you may not feel comfortable giving up the security of a home. It’s important to have realistic financial and emotional expectations about what could happen when you move from a homeowner to a renter.

Home equity loan or HELOC

If you’ve paid into your home for a few years, you can get back some of that cash through a home equity loan or home equity line of credit (HELOC). These are secured loans, and you need to put your home up as collateral, so if you miss payments, you could lose your home.

Remember that home equity loans and lines of credit are still forms of borrowed money that have to be repaid. Only go this route if you have a repayment plan in place. 

Reverse mortgage

Seniors 62 years or older may qualify for a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage. A reverse mortgage is when you take out a loan using your home as collateral, but instead of making monthly mortgage payments, your loan isn’t due until you no longer live in the home. 

Even though this is an option — especially for seniors — it does come with some risk. While you aren’t required to repay a reverse mortgage the same way as a traditional mortgage or loan, the interest and fees still get charged. Your balance increases every month, so your home equity decreases. 

Before you can get a HECM, federal law requires you to complete counseling with a HUD-approved housing counselor. Use the free locator at HUD.gov to find one.

Equity Costs to Think About

Before you tap into your home’s equity, keep in mind the risks and costs.

The average seller's closing costs are 8% to 10% of the home’s sale price. That means on a $350,000 home sale, you have to cover up to $35,000 of agent commissions and seller fees. This amount doesn’t include the cost of moving, which can run into the thousands, depending on what you’re moving, where you’re going, and what you need.

Choosing to stay, paying off your home, and owning it free and clear are big accomplishments. But you still have other ongoing costs aside from a mortgage payment. 

You still have to pay for property taxes, homeowners' insurance, utility bills, and regular home maintenance. You can use Ownwell to help lower your property taxes if you live in an eligible state. Customers who earn a reduction can save an average of $774.

Even if you’re planning to sell at some point, leaving doesn’t necessarily mean you’ll get top dollar for your home. Housing prices and local markets regularly fluctuate. If you sell in a down market, you could end up getting less for your home than expected, which could hurt your retirement plan. 

Bottom Line

Your home has become one of your most valuable assets. But even though it’s a large enough asset to cover your retirement costs, it shouldn’t be your only option. Before making any major decision about your home equity, consider speaking with a fiduciary financial advisor — someone who is legally required to act in your interest, not earn a commission on what they sell you.

Instead, make your home a backup retirement plan. Continue utilizing your other savings options — like a work-sponsored 401(k), IRA, or other investments — and avoid forcing yourself to make a decision about your home before you’re ready. Let your home be a cushion that gives you peace of mind during retirement so you can enjoy that time, not dread it.