According to a recent survey conducted by SurveyMonkey and CNBC.com, a significant percentage of workers feel confident about their retirement readiness, with 37% believing they are either “ahead of schedule” or “on schedule” in their savings. Factors contributing to this confidence include starting retirement savings early, having little to no debt, and owning a home with equity. However, experts warn that homeowners may be overestimating their retirement preparedness due to misconceptions about the value of their home.
Expert Insights on Homeowners’ Retirement Readiness
Angie Chen, a senior research economist at the Center for Retirement Research at Boston College, cautions that homeowners may be overconfident in their retirement readiness. She notes that while homeowners may feel financially secure due to the value of their property, they often overlook the amount of debt they still owe on their homes. Chen emphasizes the importance of considering not just the value of the home but also the outstanding mortgage balance when assessing retirement readiness.
Chen explains that individuals who own homes but have significant mortgage debt are more likely to be overconfident or underestimate their retirement risk. For example, if someone purchased a $500,000 house but still owes $400,000 on the mortgage, their equity is only $100,000. Chen advises homeowners to be mindful of their borrowing against home equity, as it may not be as accessible or practical for retirement expenses as other forms of savings.
Benefits of Homeownership in Retirement
Despite the potential pitfalls of overestimating the role of home equity in retirement planning, owning a home can offer various financial advantages during retirement. Winnie Sun, co-founder of Sun Group Wealth Partners, highlights the dual benefits of homeownership. Firstly, homeowners build equity in their property over time, which can be accessed as a lump sum when they sell the property, particularly if they downsize in retirement.
Moreover, owning a home provides a sense of stability in housing costs during retirement. Sun points out that homeowners can benefit from a controlled cost of housing, including a fixed mortgage payment. While expenses like home insurance and property taxes may increase, seniors may qualify for discounted utilities as they age, further reducing housing costs.
Sun also notes that home equity can serve as an emergency fund for retirees. While a house may not be a liquid asset, homeowners have the option to tap into their equity if needed to cover unexpected expenses. This flexibility can provide a safety net for retirees facing financial challenges.
Understanding Retirement Risk and Financial Preparedness
The Center for Retirement Research’s National Retirement Risk Index (NRRI) measures the percentage of working-age households at risk of financial unpreparedness for retirement. According to a CRR analysis, 28% of individuals underestimate their retirement risk, believing they are not in jeopardy when the NRRI indicates otherwise.
Chen emphasizes the importance of a comprehensive assessment of retirement readiness, taking into account not just home equity but also mortgage debt. Understanding the true value of one’s assets and liabilities is crucial for making informed decisions about retirement planning. By recognizing the potential risks associated with homeownership, individuals can better prepare for their financial future.
In conclusion, while owning a home can provide certain financial benefits in retirement, it is essential for homeowners to approach their retirement planning with caution and realistic expectations. By considering the full picture of their financial situation, including home equity and mortgage debt, individuals can make informed decisions to ensure a secure retirement.