February 14, 2020

How to Outsmart Equity: America’s New Retirement Plan

It’s difficult to think about retirement while you’re still paying off student loans. But for many of us, retirement is only a decade or so in the future, and the safety nets that once existed to supplement retirees’ incomes are quickly disappearing. That’s why Americans are rethinking retirement and getting smarter about planning for it. Unison conducted a survey of American homeowners to learn what they’re doing to prepare for retirement and how their homes factor into that planning.

What lies ahead

Almost half (48%) of American homeowners say they plan to retire in their 60s. Another 9% plan to do so during their 50s and 22% say their 70s. For a 30-year retirement at $40,000 per year, that equals about $1.18 million (using average returns of 6% and inflation at 2.5%). That number is a mystery to the one in five homeowners who don’t know how much they need to have saved by the time they retire in order to feel secure and live comfortably. Not having a savings goal in mind ahead of time means homeowners are more likely to miss the mark.

In fact, the amount Americans have in savings indicates they don’t understand how much retirement costs: 47% of American homeowners have currently saved around $250k or less, and 35% say they would be comfortable with amounts less than $750k total saved by the time they retire. That would mean trying to live comfortably on less than $20k/year, factoring in inflation.

For those already retired, social security could be expected to fill in the gap between savings and living expenses but social security might not even be enough to cover rent. That’s a sobering thought, considering that 70% of American homeowners and 50% of millennial homeowners are planning to fund their retirement via social security. Alright, let’s assume social security isn’t an option and you haven’t saved quite enough to be able to retire and live comfortably: that’s what a house is for, right?

Maybe.

Making moves

Many of us have parents whose homes have doubled or tripled in value since they were first purchased. If, for instance, your parents bought a home in the Bay Area in the 70s, that home is likely worth over a million dollars now. But it would be impossible to sell that home, buy another smaller home in the area at market rate and still have enough to support their retirement. They’re sitting on equity they can’t access in a home that’s rapidly becoming a burden as the home ages.

That’s a common scenario: the vast majority of American homeowners (90%) think of their home more as a financial asset than a financial burden, and 25% of homeowners plan on using their home to fund their retirement. In fact, a quarter of American homeowners say more than half their total net worth is tied up in their home. The data states that the American home is an important part of overcoming shortcomings in other forms of retirement savings.

How do homeowners plan on using their homes to fund their retirement? By moving. Among those planning to sell their home to fund their retirement, 38% say they’ll move to a less expensive area with a lower cost of living. That’s a drastic change to bank on making in the future, especially when there’s no knowing what the market will be like twenty years from now.

The riskiest part of your portfolio

Homeowners place emotions first: the emotional value homeowners see from its role as a place for family to come home and gather (34%) and memories made in the home (31%) take priority over their home’s monetary value. But when your home makes up the majority of your overall financial portfolio, it should be viewed as a financial asset out of necessity. And there’s no telling if your home will appreciate or depreciate when it comes time to sell it and fund your retirement.

That’s a risk, especially because 70% of homeowners think their house will be worth more by the time they retire. If the home they’re banking on to fund their retirement suddenly drops in value, it will delay retirement for 39% of homeowners.

Homeowners need to have a contingency plan to fund their retirement; recessions don’t happen often, but they do happen, and poor timing could ruin retirement for hundreds of thousands of Americans.

Outsmarting Equity

So, what is the smart solution people are turning to to plan for retirement with all these unknowns? It’s accessing the equity in your home without going into further debt.

Unison provides an alternative solution that allows homeowners to convert up to 17.5% of their home equity to cash. It’s a solution that allows homeowners to utilize home equity without interest or monthly payments. Current solutions such as HELOCs and home equity loans involve borrowing money from your equity, which requires monthly repayments with interest and fees to repay the money lent to you.

That means homeowners can use that cash to supplement their retirement savings and maintain their standard of living for years to come. And when the time comes to move (up to 30 years later), Unison shares in the appreciation and, in most cases, the depreciation of your home.

Retirement should be something to look forward to: a time of relaxation and reflection rather than procrastination and panic. With Unison’s solution to smarter equity, it can be.