Does Your House Count Toward Retirement? Home Equity and Financial Freedom

If you own a home, there is a good chance it represents one of the largest assets on your balance sheet.

That raises an important retirement planning question:

Does my house count toward my retirement savings?

The short answer is yes, but with an important qualification.

Your home can absolutely be part of your overall wealth and financial plan. However, the value of your home does not automatically provide retirement income.

A $700,000 house does not generate $700,000 of retirement spending money simply because you own it.

To turn home equity into retirement resources, you generally need a strategy for using that equity. You might sell, downsize, move to a less expensive area, rent the property, borrow against the equity or eventually use the home as part of your estate plan.

That distinction between wealth and usable retirement resources is critical when determining whether you can afford to retire.

Is Your House Part of Your Retirement Wealth?

Your net worth includes the value of assets you own, minus debts and other liabilities.

If you own a $700,000 home with a $200,000 mortgage, the home may represent approximately $500,000 of equity before considering selling costs and other factors.

That equity is real wealth.

But it is different from having $500,000 invested in a retirement account.

An investment portfolio can potentially produce income while you continue living in your home.

Home equity generally requires a decision to access it.

This is why retirement planning should distinguish between your net worth and your retirement income resources.

Home Equity and Your Financial Freedom Number

Your financial freedom number is generally based on the resources required to support your future spending and financial goals.

A primary residence can affect that number in several ways.

First, housing is one of the largest categories of spending for many households.

Second, owning a home can eliminate or reduce rent payments.

Third, home equity can potentially become a source of funds if you sell or otherwise access it.

Fourth, the home itself may have significant value that could eventually become part of your estate.

Therefore, your home can influence financial freedom even if you never intend to sell it.

For more on determining the amount of wealth you may need, see How Much Money Do I Need to Retire? and How to Calculate Your Financial Freedom Number .

The Biggest Question: Will You Still Live There?

One of the simplest ways to think about home equity is to ask what you actually intend to do with the property.

If you plan to live in your current home for the rest of your life, you may not want to count the home's full value as money available to fund retirement spending.

The home may instead provide:

• A place to live
• Protection from rising rents
• Housing stability
• Potential future equity
• A potential estate asset

If you plan to sell the home and move somewhere less expensive, however, some of the equity may become available for other financial goals.

The difference between these two situations can be enormous.

Housing Is More Than the Mortgage

Retirement housing costs are not limited to mortgage payments.

Even after a mortgage is paid off, homeowners can face:

• Property taxes
• Home insurance
• Utilities
• Maintenance
• Repairs
• Renovations
• Landscaping
• Snow removal
• Condo or homeowners association fees

Some of these expenses can increase as a home gets older.

This means that owning a home does not necessarily mean housing is inexpensive.

Your retirement plan should include the actual ongoing cost of maintaining your home.

A Mortgage-Free Home Can Still Be Expensive

Paying off your mortgage is often an important financial milestone.

But a mortgage-free home does not mean your housing costs become zero.

Consider a homeowner who has no mortgage but spends $10,000 per year on property taxes, insurance, utilities and maintenance.

Over a 25-year retirement, that is $250,000 before considering inflation or major unexpected repairs.

Housing should therefore be included in your retirement spending projection whether or not the mortgage is paid off.

Should You Downsize in Retirement?

Downsizing can be one of the most powerful housing decisions in retirement.

Suppose you own a large home that is worth $800,000 and decide to move into a smaller home costing $500,000.

In a simplified example, the difference could potentially release substantial equity.

But the financial benefit is not limited to the difference in purchase prices.

A smaller home may also require:

• Less maintenance
• Lower utilities
• Lower insurance costs
• Less property tax in some situations
• Less spending on repairs and renovations
• Less time spent maintaining the property

Downsizing can therefore affect both your assets and your ongoing retirement spending.

But Downsizing Is Not Automatically Better

A smaller home is not necessarily the right choice for everyone.

Selling and buying another property creates transaction costs and may involve taxes, moving expenses, renovations and other costs.

More importantly, your home is not just an investment.

It is where you live.

A home may provide access to family, friends, community, hobbies, healthcare, transportation and other things that are difficult to measure financially.

A retirement plan should therefore consider the lifestyle impact of a housing decision as well as the financial impact.

What If You Move to a Less Expensive Area?

Another possibility is moving to a different city, province, state or country where housing costs are lower.

This can potentially reduce both the amount required to purchase a home and the ongoing cost of living.

But the decision can also change:

• Taxes
• Healthcare costs
• Insurance costs
• Transportation needs
• Travel expenses
• Family proximity
• Access to services
• Property taxes
• Overall retirement spending

Moving for a lower house price may therefore produce an unexpected result if other living expenses increase.

The entire budget should be modeled rather than looking at housing prices alone.

What If You Sell Your House and Rent?

Selling a home and renting can release substantial home equity.

That money could potentially be invested and used to supplement retirement income.

However, renting creates an ongoing housing expense.

A retiree considering this strategy should compare:

• Net proceeds from selling
• Expected investment returns
• Future rent
• Rent inflation
• Taxes
• Insurance
• Maintenance costs
• Expected longevity

The result can be very different depending on the assumptions.

What If You Keep the House and Rent It Out?

Another option is converting a primary residence into a rental property.

Rental income can potentially become another source of retirement cash flow.

But a rental property is not the same as a guaranteed pension.

You may have:

• Vacancy periods
• Maintenance costs
• Property taxes
• Insurance
• Management costs
• Repairs
• Financing costs
• Tax considerations

If rental income is part of your retirement plan, the plan should model both the income and the expenses rather than counting only the gross rent.

Home Equity Is Different From an Investment Portfolio

A common mistake is to compare home equity directly with investment assets as though they are interchangeable.

Suppose you have:

• $500,000 in investments
• $500,000 of home equity

You might reasonably say you have approximately $1 million in net worth before considering other assets and liabilities.

But that does not mean you have $1 million available to generate retirement income.

If you continue living in the home, much of that $500,000 of equity remains tied to the property.

This is why retirement planning should distinguish between assets you own and assets you expect to use for retirement income.

Should You Include Your House in a Retirement Calculator?

Yes, if the calculator allows you to model how the home affects your retirement plan.

But simply entering the value of your house and adding it to your retirement savings can be misleading.

A useful retirement model should consider:

• Current home value
• Mortgage balance
• Housing costs
• Expected appreciation
• Property taxes
• Maintenance
• Potential downsizing
• Potential sale
• Potential rental income
• Future housing needs

The important thing is not simply what your house is worth today.

It is how the house fits into your future financial plan.

Housing Can Change How Much You Need to Retire

Consider two hypothetical retirees.

Retiree A owns a mortgage-free home but spends $15,000 per year on property taxes, utilities, insurance and maintenance.

Retiree B sells a more expensive home, moves into a less expensive property and reduces ongoing housing costs to $8,000 per year.

Even if both retirees have similar investment portfolios, their retirement income requirements can be very different.

This is why housing can be one of the most powerful retirement planning levers.

It can affect both assets and expenses.

Housing Decisions Can Be Retirement What-If Scenarios

You do not necessarily need to decide today whether you will stay in your house forever.

Instead, you can model different possibilities.

For example:

• Stay in the current home
• Downsize at retirement
• Downsize at age 70
• Sell and rent
• Move to a lower-cost location
• Convert the property to a rental
• Sell later in retirement

These are excellent examples of retirement What-If scenarios .

The objective is not to predict which scenario will happen.

It is to understand how each decision could affect your retirement plan.

Housing and Retirement Spending

Housing is one of the reasons that retirement spending can be more complicated than a single annual number.

Your housing costs may change substantially throughout retirement.

Your mortgage might disappear.

You might renovate.

You might downsize.

You might move.

You might need additional support later in life.

This is why your retirement spending plan should account for major housing changes rather than assuming that today's housing expenses will remain unchanged forever.

For more on retirement spending, see How Much Should I Spend in Retirement? .

Housing and Early Retirement

Housing can be particularly important if you want to retire early.

An expensive home can increase the amount of income your portfolio needs to generate every year.

Conversely, reducing housing costs can lower your annual spending requirement.

That can make early retirement more achievable without necessarily requiring dramatically higher investment returns.

This is one of the reasons improving your retirement plan is not always about earning a higher return.

Reducing a major recurring expense can have an enormous effect on the amount of money you need.

Home Equity and Financial Freedom

Financial freedom does not necessarily mean having a specific amount of money in investment accounts.

It means having enough resources and flexibility to support the life you want without being financially dependent on employment.

Your home can contribute to that freedom by reducing housing expenses, providing stability and potentially creating future financial resources.

But the home should be evaluated realistically.

A large amount of home equity does not necessarily solve a retirement income problem if you have no intention of accessing it.

Conversely, someone with a relatively modest investment portfolio may have a very strong retirement plan if their housing costs are low and their other sources of reliable income are substantial.

How Retirementize Can Help You Model Your Home

Retirementize includes housing as part of the broader retirement picture so that your home does not have to be treated as a number sitting outside the retirement plan.

You can consider your residence alongside your income, investments, pensions, government benefits, spending and other financial assumptions.

This allows you to explore the effect of different housing decisions on the overall retirement projection.

For example, you can compare a plan where you remain in your current home with a scenario where you downsize or otherwise change your housing situation.

That can help answer a much more useful question than simply asking what your house is worth:

How does my home affect my ability to fund the retirement I want?

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

Housing is a perfect example of why retirement planning should not be reduced to one number.

PLAN. Understand your home value, mortgage, housing costs and future housing goals.

IMPROVE. Consider whether changing your housing situation could reduce spending or increase financial flexibility.

TEST. Compare staying in your home, downsizing, moving, renting or accessing home equity.

CONFIRM. Determine whether the housing strategy supports your retirement income needs and lifestyle.

REPEAT. Revisit the decision as your home, finances, family and retirement goals change.

Does My House Count Toward Retirement? Frequently Asked Questions

Should I count my house as part of my retirement savings?

Your home can absolutely be part of your overall wealth, but you should be careful about treating its full value as retirement savings. If you plan to continue living there, the equity may not generate retirement income unless you eventually sell or otherwise access it.

Can I retire if most of my wealth is in my house?

Potentially, but it depends on your income needs and how you intend to use the home. You may have substantial net worth but relatively limited investment income if most of your wealth is tied up in your residence.

Should I sell my house to retire?

Selling your home is one possible retirement strategy, but it is not automatically the right decision. Compare the financial impact with the lifestyle, housing and family consequences of moving.

Does downsizing help you retire earlier?

It can. Downsizing may release home equity and can potentially reduce ongoing housing expenses. Both effects can improve a retirement plan, depending on the circumstances.

Should I pay off my mortgage before retiring?

Paying off a mortgage can reduce required retirement cash flow, but the best decision depends on interest rates, investment opportunities, taxes, liquidity and your overall financial situation. It should be evaluated as part of the complete plan.

Is home equity the same as retirement income?

No. Home equity is an asset. Retirement income is cash flow available to support your expenses. Home equity can potentially become a source of retirement income, but it generally requires a decision to access the value.

Fun Facts About Home Equity and Retirement

Where This Article Fits in the Series

This is Article #16 in our financial freedom and retirement planning series.

Earlier articles explored how much you need to retire, how to calculate your financial freedom number and how to improve your retirement plan.

Housing adds another important dimension because your home can affect both your wealth and your spending.

Continue with:

• Article #2: How Much Money Do I Need to Retire?
• Article #4: How to Calculate Your Financial Freedom Number
• Article #5: How to Create a Financial Freedom Plan
• Article #8: 10 Ways to Improve Your Retirement Plan
• Article #9: How to Reach Financial Freedom Faster
• Article #11: How Much Should I Spend in Retirement?
• Article #17: Test Your Retirement Plan
• Article #23: Retirement What-If Scenarios

Housing also connects naturally with the later articles in this series on retirement planning, monitoring and financial advisors. Your home should be part of the conversation whenever you are evaluating whether your retirement plan is truly sustainable.

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