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Opinion: Plan for retirement with home equity in mind

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The American Dream is no longer simply owning a house surrounded by a white picket fence. In today’s world, owning a house that helps you build financial security in each phase of your life – well into retirement – is one of the keys to what true dreams are made of.

Even with homeownership close to its lowest rate in years, 64 percent of Americans still own a home, according to the U.S. Census Bureau. But many homeowners make the mistake of relying on their primary residence to be their retirement nest egg when, in reality, it should be only one part of a larger equation. Depending on where you are on your financial journey, it is important to have a clear picture of how homeownership can be a successful and sustainable investment. Let’s review how your home fits into the different stages of your investment life.

The run-up to retirement
Let’s say you have 20 years until retirement. In this stage, your home can play a big role in your portfolio because it provides you and your family a place to live, but also because it builds equity as you pay down the mortgage. It is important to invest in a home that will grow with your family as well as grow in value. That means locking in a low fixed-rate mortgage, which captures value early on, and purchasing in a desirable location with proven appreciation. That said, saving for your retirement should still be the top priority. A home that fits your current situation and doesn’t take away from savings will help you in the long term. Do not try so hard to “keep up with the Joneses” that you end up trapped with a huge mortgage payment that keeps you from saving for your retirement. No one would willingly enslave himself, but because of poor purchasing decisions, some have become slaves to a home mortgage.

Questions to consider:

• What is the potential for the value of my home to grow? Is the neighborhood developing or is it deteriorating?

• Am I living within my means? Is this home hindering or helping my ability to save for retirement?

The red zone
Now, there’s roughly a decade left before you can sit back and really enjoy the fruits of your labor. Before that can happen, your main goal during this crucial time should be to have your house paid off and in a condition that will serve you best later in life. You will want to consider if your current house will transition into the next phase of your life and what major expenses it will need then. For example, consider whether your house is handicapped-accessible or at least easy to navigate and free of unintended obstacles. You will need to hire a contractor to inspect your home to look for any major structural and functional concerns that you can address while you are still in the workforce. According to HomeAdvisor data, the average cost of making a home handicapped-accessible is roughly $5,000 nationally, but in Missouri it’s in the $2,600 range. Being proactive rather than reactive will ensure your house is not a burden.

Questions to consider:

• Is this the house I want to live in when I retire? Will it accommodate my needs?

• What maintenance do I need to do while I am still working to limit the unexpected big-ticket expenses?

• What are my financial priorities in retirement? Will ownership of this home hinder those priorities?

End goal
Of course, there always will be things to work on and improvements to be made in any home. The average American spends around $4,000 on home repairs annually. Because you have prepared in the “retirement red zone” and have a financial plan that eases you into retirement, you can minimize surprises – including the maintenance needs that arise from year to year. Make sure you schedule home maintenance in your retirement budget. Everyone wants to set aside money and plan for travel during retirement, but it is just as important to proactively maintain your home’s value through proper maintenance. You want to give yourself the option of selling it later in life if you need to transition into senior housing or assisted living.

Questions to consider:

• Have I saved enough to ensure home maintenance?

• What must I do to maintain or increase my home’s value?

No matter what stage you are in, it’s important to develop and manage your financial plan that allows you to live within your means while saving for the future. Do not ask yourself, “What can I afford now?” Rather, ask, “What will I be able to afford in retirement when I have a fixed income?” That way, the house you have worked so hard to turn into your lifelong home has turned into a great investment – one that you own and that has great equity.

Richard Baker is a financial adviser with Prime Capital Investment Advisors in Springfield. He can be reached at rbaker@primecap-ia.com.

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