Sep 6, 2024
If you are in your 60s with too little retirement savings, you aren't alone. The median balance in defined contribution plans of those ages 55 to 67 is just $87,571, according to the Vanguard How America Saves Report.
It’s not a comfortable financial position, as a $50,000 nest egg only allows you to withdraw around $2,000 in annual income, assuming you follow the 4% rule to set a safe withdrawal rate. With Social Security only replacing around 40% of pre-retirement income, $2,000 to spend each year from savings simply won't cut it. You must find ways to boost your savings.
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If you're like many older Americans whose houses have increased in value, your home may seem like the perfect solution. If you sell and downsize, you can pocket the equity you've earned over time and use that money to bulk up your retirement accounts.
While this idea may sound great on the surface, is there a better alternative?
Downsizing your home may be the best solution in limited situations
Selling your home can be the right solution — if it will provide you enough cash to buy a cheaper home and still put a significant lump sum into a retirement plan. If you can't do that, selling your house might not improve your situation all that much.
First, selling your house can cost a lot of money — according to Zillow, estimates average closing costs for sellers in the 8% to 10% range. Although recent changes to real estate commission rules may mean you pay less, you're still likely to be out thousands. If you sell a $350,000 home and pay a 6% commission, you'll walk away with only $329,000. That doesn’t include other costs, such as lawyer’s fees and moving expenses.
You likely won't owe capital gains taxes on your home sale as there's a $250,000 exemption for single tax filers and a $500,000 exemption for married joint filers — providing you meet certain requirements. However, if you didn't live in your house for long or had a capital gain exceeding these amounts, you could lose a portion of your proceeds to the government.
There's also the matter of finding someplace else to live.
If you pay cash for a new home, it will reduce the amount you can invest. If you're getting a mortgage, current rates are down slightly from recent record highs but well above where they've been for most of the 2010s and pre-pandemic 2020s. If you're renting, you'll have a landlord to deal with and rents in metro areas are up over 30% since 2019. With both rent and mortgage rates up so much, a "cheaper" home may not save you a ton.
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Before you give up your paid-off house — and the very low financial obligation that comes with it — find out exactly how much extra income the sale of your home will provide.
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Working longer could be the best solution for too little savings
For most near-retirees with too little money saved, the best course of action may be to delay retirement for as long as possible.
Working longer will provide more opportunities to boost your retirement savings through your contributions and employer’s 401(k) match.
For example, let’s say you invest an extra $5,000 annually from age 61 to 70, with your employer matching half that amount. You'd put $7,500 in total into your plan. Earning a 7.00% annual return would bring your $50,000 account balance to $181,757.88 during that time frame. That's more than triple what you'd have if you left earlier.
Delaying also allows you to put off collecting Social Security. Doing so can increase your standard benefit by 8% per year for each year you wait beyond your full retirement age. You also won't have to start drawing down your savings as soon, so you delay when your balance begins dwindling instead of growing.
Of course, working until 70 isn't feasible for everyone. However, if you set this as a goal and aim to work for as long as you can in some capacity, you may achieve a secure retirement in the home you worked so hard to pay off.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
