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The downside of counting on home equity

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Many of our clients picture themselves living in downtown Boston after they retire, enjoying all that this wonderful city has to offer.

Downsizing is a part of the planning discussion, as it is much more practical to live in Boston as empty nesters requiring much less space. In downsizing, clients hope to tap into home equity for retirement income while also accommodating for any future mobility limitations.

Boston, however, is one of the hottest real estate markets in the country, rivaling New York, San Francisco and Seattle. Prices in downtown Boston have appreciated rapidly, and pricing trends aren’t much better for buyers in the more appealing suburbs of Boston.

The real estate market in the Boston area has many clients realizing that downsizing is really upsizing in terms of cost. Homes or facilities that have access to public transportation and ancillary services are often more expensive than the existing larger family home.

Unless clients are willing to move out of the region, it may be harder to unlock real estate equity values.

And the option of moving is less appealing than it used to be in some regions.

Portland, Ore., and Seattle have been destinations of choice for those taking equity out of California homes, but soaring home prices and resentful locals have made both destinations a little less welcoming.

There are also different ways to tap into home equity, including equity lines, sale-leaseback of homes to family members and reverse mortgages. Each alternative comes with advantages and disadvantages, in some cases with significant disadvantages.

As a result, we generally exclude home equity as a source of additional retirement income when planning for clients. We primarily think of the home as a place to live in during retirement, rather than as part of a client’s retirement nest egg.

Although we encourage clients to keep the ideal picture of their lives in retirement in their minds, we also advise them to be practical about the financial implications.

This story is part of a 30-30 series on tools and strategies for retirement.

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