Once upon a time (i.e., 2006) in a magical place called the Bay Area, the real estate market got so heated that it became commonplace to hear coffee shop patrons trading stories about their little old million-dollar houses. It became equally commonplace for this excess of home equity to create a false sense of financial security, causing many a homeowner to save less for the future than they might have otherwise. This practice was just as inadvisable as it was common, as evidenced by a retirement planner’s primely located billboard at the time, which read:
“My house is worth a million dollars” is NOT a retirement plan.
But many people treated it like it was, to their detriment.
Relying upon your home equity for retirement requires that you sell the place at some point, cashing out and moving to someplace cheaper (and potentially less desirable) to live, when you stop working. That said, there are a number of other, less risky ways you can use your home 5, 10, even 20 years in advance of your planned retirement date to:
save cash now, so you can add it to your investments
increase your income now, also adding it to your retirement nest egg, and/or
reduce your expenses later, which might allow you to retire sooner (at a time when retiring at all is a true feat).
Here are six sets of strategies for using your home to help you retire – without having to sell the place and retire in Timbuktu:
1. Put your spare space to work.
Depending on where you live and whether you have room, you may be able to rent your home out, a little bit at a time. On sites like VRBO and Airbnb you can rent out as little as one room, your mother-in-law unit or your whole house for one night, one week or one month (or any combination of these). Also, savvy homeowners are increasingly renting out spare rooms or floors for the long-term. I know a number of people who are now renting out their own homes while they travel on their own vacations, and still others who rent out their extra rooms while they’re at home, enjoying the side benefit of meeting new people.
If you do put your extra rooms to work, you can use the extra income to pay down your debt or to pile onto your retirement fund – just be careful of your local rent control laws, especially if you’re doing anything longer than a vacation rental.
2. Hack your utilities.
If you do the whole weather-stripping-and-dual-pane-windowing drill, you definitely stand to save some cash on your monthly utility bills. But in some areas, homeowners might also be able to save, big-time, with little or no cash out of pocket by opting out of their regular utility service and into something called solar power service. These companies sell solar power as a service, on a long-term contract, so home owners don’t have to pay for panels, then charge a lower power rate than the traditional utilities.
What you save over these years you can redirect to your retirement. And to boot, some of these companies also allow you to fix your utility rate for a 20-year period so that in your retirement years, you will not be exposed to the unpredictability of energy rate increases.
3. Pay your mortgage off early.
There are two levers you can pull to supercharge your retirement plan: (1) you can boost the income you’ll have to save and live on or (2) you can slash your future living expenses. The largest of these living expenses is, of course, your mortgage. For my grandmother’s generation, the norm was to pay off your 30-year mortgage right about the same time you were winding down a 30-year career. But today, it’s much more common for people to retire with 5, 10, 15 years or more still left on their mortgages.
One way to get to retirement sooner? Pay your mortgage off early. Enter three different time frames in which you’d like to pay your home loan off (i.e., in 7, 9 and 11 years from now) and enter that time period and the current balance you still owe on your mortgage (loan amount) into our mortgage terms calculator to figure out how much you’d have to pay every month to meet any of these targets.
If you can’t swing making a higher payment for one of your ideal payoff time frames, try this: simply round your monthly payment up to the nearest hundred or thousand dollars every month, if you can afford it. You’d be surprised at how even small, extra payments can snowball into an early mortgage payoff.
Here’s another option: pay 1/2 of your monthly every two weeks – because there are 52 weeks in the year, paying on that schedule results in making 26 half, and 13 full payments each year. The extra payment can pay off a 30 year loan as much as 4 or 5 years early! (Note: you can get the same result by simply paying an extra 1/12th of your mortgage payment every month.) However you do it, make sure you tell your mortgage servicer to dedicate any overage you pay toward your principal balance.
4. Tune up your mortgage. If you’ve been in your home a few years, it can be easy to tune out of the whole mortgage scene – especially after five years of mostly bad news. But the news now might be better than you think, as home values are starting to steady and even edge up, and rates are still uber-low. If you have a 6 percent home loan you got 6 years ago, you stand to save thousands and thousands of dollars by refinancing into a 3.6 percent loan (the going rate this week). And that’s thousands and thousands you can put into your retirement fund. (Of course, the precise amount that you personally will save from refinancing depends on your current interest rate, your loan amount and the costs you incur refinancing.)
So, reconnect with your mortgage broker and pay attention to interest rates – especially if you’re paying more than 5 percent. And just generally click out of mortgage autopilot, watching your statements and asking questions about things you don’t understand. For example, you might still be paying a Private Mortgage Insurance premium that you can get removed upon request, assuming you’ve been in the loan long enough and your home has enough value beyond the loan amount (the precise standards vary from loan to loan, but check in with your mortgage broker and your lender to see if you can ditch your PMI payments anytime soon and put that money toward your retirement savings).
5. Start a side business from home. Put your home to work! Whether you use your space to dog-sit, baby-sit, bake or make preserves to sell at the farmer’s market, using your home to start a side business or to work a side job can pull the “extra income” lever of the retirement cushion-fluffing equation. It might also enable you to claim a home office deduction from your income taxes, depending on whether you’re able to dedicate the space completely to your business endeavor.
Read The $100 Startup to make sure you don’t spend more in startup expenses than you make. Also, consult with a tax expert to be sure that you dot your i’s and cross your t’s; depending on how you structure your business, you may end up increasing your tax burden, an unpleasant result a real pro can help you avoid.
6. Trim your taxes. Follow these steps:
Type your address into the search box at Trulia.com.
Compare the Trulia Estimate against the tax assessment (you can find your assessed value on the same page under Property Taxes, or on your tax bill).
If your Trulia Estimate – or the prices you know nearby homes have recently sold for – is at or below the assessed value, you may want to apply to have your home’s value reassessed.
On your county tax assessor’s website, you’ll find the instructions and paperwork for submitting this request. (If you don’t, give them a ring!) They generally will ask you to tell them what you think your home is actually worth, and to provide some recent, comparable sales to back that dollar amount up (scroll all the way down on your home’s Trulia page, to the Sold Properties section for recently sold homes that might work).
The theme? If you can save on taxes, utilities or mortgage interest, we’re talking about the potential to save tens, even hundreds of thousands of dollars over the years between now and retirement – much more than cutting back on coffee or the occasional meal out. Same goes with using your home to bring in some extra income or paying off your mortgage early – the potential retirement-boosting results are unparalleled.