Is home equity an underutilized assetin retirement planning? Traditionally financial advisors and retirees alike tend to leave the home out of the equation when it comes to retirement planning. Older generations considered the home something to be preserved, paid off free and clear before retirement and left to heirs as a legacy.

"Historically, the previous generation was dead set against ever using the house to fund retirement," says Brad Davis, vice president of retirement income solutions for Nationwide Financial. And financial planners often view their job as asset preservation rather than the drawing down of assets. "When advisors talk to clients about assets for retirement, home equity really hasn't been part of that discussion," says Sandra Timmerman, director of the MetLife Mature Market Institute (MMI).

But many in the industry now think it is time to reconsider home equity as an integral part of a client's long-term portfolio and to figure out strategies for leveraging clients' homes that go beyond basic reverse mortgages. Protecting home equity "may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of preretirement incomes, and people rely increasingly on meager 401(k) balances rather than traditional pensions," according to a March 2010 report from the Center for Retirement Research (CRR) at Boston College.

RECONSIDER THE HOME

In fact, research suggests that failure to tap home equity may lead to undue hardship in retirement for boomers. The decision not to tap home equity through a reverse mortgage increases the percentage of retirees in danger of being unable to maintain their preretirement standard of living to 61% from 51%, according to CRR. Today's retirees face more pressure on limited resources due to increased longevity and the potentially devastating cost of long-term care. Many have no defined benefit plans and may have to care for their parents as well as help out their children financially.

Reverse mortgage products have had limited appeal. Only 2% of those eligible have used a reverse mortgage, according to CRR. Advisors tend to view these heavily regulated products as complicated and expensive, used primarily by seniors in lower income brackets as a last-ditch solution.

Yet seniors have a sizable portion of their net worth tied up in their homes. In today's economy, even affluent clients may need to reconsider utilizing their home equity as a resource. "A lot of affluent people have been hit hard by the stock market crash, lost their shirts investing in real estate or perhaps their golden parachute or retiree pension has evaporated," says Barbara Stucki, PhD, director of the Reverse Mortgage Initiative for the National Council on Aging. "What may at one point have seemed like a secure future may seem less so now, and they may need to fall back on assets [such as the home] they once would not have considered using."

STRATEGIC ASSET

In fact, conventional attitudes toward home equity appear to be changing. "Households are entering retirement carrying mortgages on more expensive houses," says Tony Webb, PhD, associate director of research at CRR. "It may be a very, very nice house, but it doesn't put food on the table, and a large mortgage is an expense that has to be met every month."

The proportion of homeowners aged 65 and older who have some type of home loan has grown significantly in recent years, to 32% in 2007 from just 24% in 1999, according to a June 2009 study by MMI and the National Council on Aging. The study also found that 51.9% of households with incomes of at least $40,000 and homes worth $250,000 or more were still making monthly mortgage payments. Faced with the question of how to fund their retirement, such homeowners may be interested in exploring ways to tap their housing-related wealth.

"Ultimately planners need to think about home equity as a strategic asset in retirement, rather than simply an asset to be preserved, because a lot of people are making dumb mistakes such as taking on high interest credit card debt or depriving themselves of a lifestyle," says Stucki, who led the MMI study. "I'm not encouraging people to tap the equity in their home-it may not be the best choice-but it should be an important conversation. And it should be done in a strategic and orderly way, not in a moment of crisis."

Talk with your clients about these different ways of unlocking home equity in retirement:

* Take a home equity loan? While home equity loans are relatively low cost, they are not an ideal solution in retirement since they create another monthly bill without reducing housing expenses. "It's pretty cheap money, but it's best used for short-term goals, such as buying a car, when you don't want to liquidate your stock portfolio," suggests Kevin Meehan, a certified financial planner with Summit Wealth Advisors in Itasca, Ill.