The average American aged 65 to 74 has about $609,000 in retirement savings, according to the Federal Reserve. If you’re nearing retirement and pretty much have no savings, you may be inclined to panic just a bit.

But what if instead of savings, you’re approaching retirement with a paid-off home worth a lot of money — say, $1 million?

As of 2022, homeowners aged 65 and older had a median home equity of $250,000, according to the National Council on Aging. That’s due in part to a recent rise in home values.

If you have a $1 million home you no longer have a mortgage on, then you’re looking at four-times as much equity as the typical senior based on the number above. In theory, that puts you in a pretty good spot, even in the absence of a robust IRA or 401(k).

But while home equity is something you may be able to fall back on as a retiree without savings, it’s not a perfect solution. And it’s important to recognize the drawbacks of having to rely on home equity to get by financially.

The problem with tapping home equity

As a retiree or near-retiree, you have different options for tapping home equity for money. You could take out a home equity loan or line of credit (HELOC), which you then pay back over time. Or, you could look into a reverse mortgage, which you’re eligible for if you’re 62 or older.

With a reverse mortgage, instead of paying a lender every month, a lender pays you. Your loan can be repaid in the form of selling your home in your lifetime or when you pass away. (To be clear, you can also repay that loan in cash. But chances are, if you’re taking out a reverse mortgage, it’s because you don’t have cash available.)

The problem with a home equity loan or HELOC, though, is that it creates a liability for you. You still have to make payments on your loan or line of credit, and there can be high upfront costs in setting it up. Plus, with a HELOC, your monthly payments can be unpredictable due to variable interest. That’s tough to manage when you’re no longer collecting a paycheck from a job.

A reverse mortgage can similarly come with expensive fees. It could also get in the way of passing your home down to your heirs if that’s something you want to do. So a much better bet is to go into retirement with savings — or use your home to create a nest egg for yourself.

A paid-off home could take the place of a missing IRA or 401(k)

Since home equity loans, HELOCs, and reverse mortgages aren’t necessarily great solutions for generating retirement income, a smarter move may be to turn your home into your personal nest egg. You can do that by selling your home and downsizing.

Let’s say you have a $1 million home you can sell yourself so you get the full $1 million out of it without having to pay a real estate agent fee. If you’re able to downsize to a $400,000 home you can buy outright, guess what? You now have a $600,000 nest egg, which is similar to the average retirement savings balance for older Americans.

Of course, it’s also a good idea to do what you can to save for retirement separately. If you still have six months left of work, put a little bit of your salary into an IRA. Or, continue working part-time in retirement to build up a little cushion.

A paid-off home that’s worth a lot of money shouldn’t take the place of actual retirement savings. However, you can technically use one to create retirement savings for yourself if you don’t have another opportunity to do so. But either way, be wary about borrowing against your home in retirement, as that’s a route that might backfire on you.

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