Don't Count on Home Equity to Fund Retirement

home equity fund retirement
Eric Risberg/AP
By David Ning

Many people are counting on the equity they have built in their home to help fund their retirement years. But folks who are living without quite enough saved for retirement should be realistic about what that equity can provide. Here are a few reasons to be cautious about relying on home equity to provide for you financially in retirement:

Your spouse will still need a place to live. Some people assume they can use the proceeds of their house if they ever need to check themselves into a nursing home. But you can't sell your home for long-term care expenses when your significant other still needs a place to stay. Don't assume you will be living by yourself by the time long-term care is needed or that your spouse will need it at the same time. Plus, the equity in your home may not even be enough to cover the cost of a nursing home.

The value of your home equity could change. Estimating how much equity you will have in your home if you ever need the money is just a guess. You might refinance in the future, and extend the date you will be totally debt free. House prices also tend to go up and down without warning. Plus, you'll never know how much it will cost you to extract equity from your home if you ever need the cash.

Commissions and taxes will siphon off a big chunk of the value. The standard arrangement is asking the seller to pay the buy and sell realtors 6 percent of the final selling price. %VIRTUAL-article-sponsoredlinks%Then you have to contend with the possible capital gains taxes. Sure, $250,000 (or $500,000 for couples) of the gains can escape tax free, but inflation will make these seemingly large numbers much smaller in a few decades when you actually need to sell. You might also want to put the house on the market well before you actually need the cash. If you wait until the last minute you may have to sell the property at fire-sale prices because you are in a hurry.

Reverse mortgages can be very costly. Reverse mortgages allow you to continue to live in your home for the rest of your life while also getting some money, but you'll get far less than what your house is worth. The fees and interest rates for this type of loan are often rather high. Plus, if your circumstances change and you want or need to move, the loan becomes due. You may find years after taking out a reverse mortgage that you want to move out. If you don't live there for whatever reason, you'll need to start paying back that loan, which can be a huge strain on your budget.

Downsizing will net you less cash than you probably think. Many people hope to downsize and use the left over equity to supplement their nest egg. This is a great strategy because not only will you get some equity, but the cost of upkeep at your smaller place is likely to be permanently reduced as well. But be realistic about how much money you'll gain from this maneuver. There are extra costs every time you move, so factor that into your calculations in addition to the commissions and taxes.

Home equity can certainly be tapped in case of emergencies in retirement, but often works best as a last resort. No matter what, you'll always need a place to live.

Visit for more personal finance discussions.

More from U.S. News:

You Thought You Were Safe? The Myths and Realities of Your Online Security
See Gallery
Don't Count on Home Equity to Fund Retirement
For years, security professionals have emphasized the importance of shredding your personal documents before you throw them out. But Holland notes that shredding isn't as much of a priority as it used to be. "There aren't nearly as many documents with personal information out there as there were even just two years ago," he explains. "These days, it's much easier to get your information off your computer."

Passwords are your first line of defense against intruders. But, as Holland points out, even the most careful people sometimes have password breaches. "I've helped chief privacy officers from health care and security firms," he notes. "If they're getting hit, then anyone is vulnerable." While Holland notes the importance of having a good password, he emphasizes that the most important thing is paying attention to password breach notifications. If you hear that one of your passwords may have been breached, he counsels, change it immediately. And, because many of your accounts may be linked, he notes, it's not a bad idea to change the rest of your passwords as well.

One piece of advice that you don't often hear is to keep on top of software updates. But, Holland argues, updating your operating system, your software, and your security programs is one of the easiest and most important ways to ensure your security. Software companies spend a lot of time and money trying to stay ahead of online intruders -- it only makes sense to take advantage of their work.
Even if you are convinced that your security is state-of-the-art and your password is unbreakable, it never hurts to double-check your most sensitive accounts. Holland suggests regularly checking your bank and credit card statements to ensure that there aren't any inappropriate charges on your accounts. As a side benefit, this is also a great way to catch any unexpected fees that your bank may try to spring on you.
When a breach happens, a fast response can mean the difference between a minor annoyance and a major pain in the neck. With that in mind, Holland suggests talking to your bank about having transaction alerts placed on your account. Every time your account is credited with a transaction over a particular amount -- $50, for example -- your bank will send you an e-mail or text notification. If it's an expected transaction, you can discard the message; if not, you'll be able to respond immediately.
Every year, you are entitled to a free credit report from each of the reporting bureaus. Holland suggests taking advantage of this free service, noting that your credit report is a great way to track your outstanding debts and ensure that nobody is trying to open false accounts in your name. He emphasizes, however, that the best way to get your free report is by going to, not "That site's a scam," he laughs.
Read Full Story