FEDweek

Downsizing in Retirement Can Free Up Cash

While taking out a reverse mortgage is an often-cited way to use home equity for retirement living expenses, simply downsizing might accomplish much the same goal, according to the Center for Retirement Research.

“Households entering retirement will increasingly need to tap their financial assets and home equity to maintain their living standards. While home equity has been the largest store of savings for most households, retirees have generally resisted using it as part of their everyday retirement plan. They typically tap home equity only in response to a late-life financial shock,” it said.

It said there is a strong psychological resistance to taking out a reverse mortgage, or even taking out a home equity loan against a home. Only about 2 percent of eligible homeown¬ers have taken out a reverse mortgage, in many cases only after events that otherwise would have forced them to sell their homes.

“Possible reasons for the limited use of reverse mortgages include their cost, a desire to preserve home equity as a reserve or bequest, and non-rational behavioral and informational impediments,” a report said.

Meanwhile, households often enter retirement with excess space after children have left, and those houses “are often located in neighborhoods best suited for a different stage of life.”

Staying in a house that has more space is needed means paying higher than necessary costs for taxes, insurance, utilities and upkeep, while “moving to a less expensive house would allow re-tirees to spend more on items ranging from food and medical care to gifts and entertainment. They could also shift a portion of their savings from home equity to financial assets, which are far more liquid and offer higher financial returns.”

The report added, though, that the percentage of those who downsize in retirement also is low, only about 3 percent—and in many cases the reason similarly was a financial shock.