If you are worried that you may not have enough money at the time of retirement, then you are not alone. However, if you own a home, it could ease your financial concerns by helping you earn more in retirement. This conclusion is based on recent research which found that selling one’s primary home and then relocating to a cheaper housing market could help retirees net $100,000 or more in home equity.
How “Retire And Relocate” Could Help You Earn More In Retirement
New research by Vanguard Group found that a typical homeowner age 60 or older in 2019 who sold their house and relocated to a cheaper housing market was able to unlock $100,000 in home equity.
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Further, the research claimed that homeowners in the top 10th percentile were able to earn even more money by using the retire-and-relocate strategy. Using this strategy, homeowners were able to unlock median home equity of $99,019 from their homes in 2019. Moreover, the top 10% of homeowners who relocated to a less expensive region were able to fetch as much as $347,000, the research found.
To back up their results, the Vanguard team cited a simple example of an individual homeowner who purchased a home in Boston for $170,000 in the early 1990s when he was in his mid-30s. The same home would now be worth around $500,000.
Now in his mid-60s, the homeowner could sell that home and buy a smaller home elsewhere. This would result in an immediate capital gain of $200,000. Even after taxes and other fees, the individual would be left with enough money to significantly boost his retirement savings.
The report estimates that about a quarter of all U.S. retirees could earn more in retirement using this strategy. According to the report, about 80% of those aged 60 and older are homeowners, and housing wealth represents about 48% of the median wealth of this group.
Homeowners who relocate to a new locality during retirement generally enjoy a lower cost of living in the new area. As a result, their overall expenses are reduced, which, in turn, magnifies their savings.
Not for all?
Although “retire and relocate” is an effective strategy, it isn’t for everyone, and there are many reasons for this.
The first is that the amount of money that a retiree would get from selling their home is difficult to estimate. There are several uncertainties, such as the future of the housing market, that make it challenging to gauge if the value of the house will go up or down and by how much.
According to the research, retirees who relocate from a primary residence on the West Coast or in the Northeast are usually in a better position to unlock more home equity because of comparatively higher property prices in those regions. Additionally, retirees from Nevada, Utah, Colorado, Arizona and Florida are “well-positioned” to unlock more home equity, the report found.
On the other hand, the housing markets in the Midwest and South are comparatively weaker. Thus, it is possible that retirees who relocate from these areas will lose home equity.
In general, the retire-and-relocate strategy works well for two types of retirement relocators. The first are those who relocate from a booming housing market, while the second are those who move to a low-growth housing market.
Other factors to consider
Apart from the state of the housing market, people also need to consider some financial factors to correctly implement the retire-and-relocate strategy. These financial factors mainly include transportation costs and the costs of home insurance and taxes (mainly property and estate).
For example, if you sell a house valued at $1 million in high-cost areas, you can get a similar house at about half the cost in many other states. Additionally, real estate taxes and other costs, such as home insurance, utilities and other property maintenance, could be lower in other less popular areas. This would result in immediate savings of at least half a million dollars.
However, if you are considering moving from one metro area to another, then your savings may not be so much, or there could be no savings at all.
Apart from the financial costs, retirees must also consider the social cost of relocating. The social cost here means the cost of moving away from friends and family. Thus, it is important for retirees to consider whether or not they will be happy to move farther away from friends and family and whether or not someone will be around to take care of them in case of an emergency.
Before relocating to a new place, experts recommend homeowners to get a feel for that place. To do this, retirees should spend at least a month at the place where they wish to retire.
In recent years, more and more homeowners have been using the retire-and-relocate strategy to boost their retirement funds. However, this strategy is not without risk, and the biggest risk is changes in the housing market. In general, the housing market goes up, but there have been times when the market collapsed.
Thus, if you are also considering the retire-and-relocate strategy, then it is very important that you consult a professional who could help you pick the right area to relocate.