Why Your Home Isn’t a Retirement Fund

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Editor’s note: This is another cross-post from our friend and California bankruptcy lawyer, Cathy Moran. We always appreciate Cathy’s insights. This post discusses why you should never think of your home as your retirement fund. This same advise could apply to any financially-distressed person who regards his home as a cash machine.


Do you consider your house as your retirement nest egg?

You’re not alone. In fact, lots of my clients are convinced that their home stands as a perfect substitute for a retirement account.

As someone who has seen the economy go from boom to bust and back numerous times, I don’t find it reassuring.

Here are some of the best reasons why your home shouldn’t be your retirement safety net.

Real Estate Is Not Cash

The equity in your house may contribute mightily to your net worth, but it doesn’t appear in your checkbook.

The house just sits there. It doesn’t grow, and it doesn’t spit dollar bills out the window.

You can draw on its value only by selling it, moving out and renting it,  or borrowing against it.

Borrowing Against Your Home’s Value

As a retirement strategy, conventional loans against your house have some real limits.

Usually as we approach retirement, we’re looking to reduce our debts.  Paying interest on borrowed money isn’t usually a cornerstone of retirement planning.

Plus, what kind of loan is available to a retiree with reduced income and no job prospects?  Enough equity might get you a loan, but not on terms you’ll be happy about.

Move Out And Collect Rent

I hadn’t thought about this one til I ran across a Zillow listing on the supposed rental value of my house.  It’s a hot market where I live, next to Facebook, and up the highway from Google, so housing is booming.

I might be able to rent the house out for enough to pay the mortgage, rent on a smaller place and some monthly cash.

But I think this is a product of having been here a long time and some not-very-typical things happening around me.

Sell The House

Sell the house and you have cash in your pocket.

But you need somewhere else to live.  Depending on the numbers, there are options:

  • Use some of the equity to buy a cheaper house outright, and live on the difference
  • Use the proceeds to put a down payment on a replacement house, and make mortgage payments
  • Rent a home and cover your living expenses from your proceeds
  • Live with family

Don’t forget that the capital gains tax system no longer lets you roll over the gain from one house to a replacement house.  Instead, you get to exclude  some part of the gain from income when you sell.  Currently, a single person can exclude $250,000 in gain, a married couple $500,000.

You keep  a lot of money tax free before your proceeds shrink because of  tax.  But, consider whether it’s really a lot of money if that’s what you have to support yourself for the balance of your lifetime.

If you envision buying a cheaper house, will that require you to move from your current community?  Is a change of scene part of your retirement plan? Or do you treasure the connections you have where you are? Read more . . .


Financially distressed or underwater on your home and confused about your options? Contact Cossitt Law  at 406-756-5616 to schedule an initial consultation.  At the end of the initial consultation, you will understand the pros and cons of your options and be able to make an informed decision with confidence. You will also understand the next steps involved to address your problem and obtain financial relief.


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