Counting on your home's value for retirement? Here’s why that strategy could backfire

But experts say it’s risky to rely solely on your home’s value when it comes to your financial plan for retirement.

One study even found that older Americans who sell their homes after age 70 receive lower returns. Read on to learn the advantages of diversifying your retirement planning.

Locked in

The problem with relying solely on your home as your retirement nest egg is that you’ll need to access its value, but you’ll also need a place to live.

One expert says that if your plan is to sell and access your equity, it can be beneficial to do so earlier than later. Stephen Kates, a certified financial planner, told Realtor.com that it’s “often better to downsize before retirement or early enough for that equity to go to work supplementing retirement income.”

However, there is the possibility that your home might not be worth as much as you think it is.

A Federal Reserve Bank of Philadelphia study found that homes sold by older Americans “tend to have lower rates of major renovations and higher rates of poor upkeep.”

The study found that while there’s little difference between the returns achieved by sellers age 40 to 70, the decline in returns starts at age 70 and increases with age. An 80-year-old could expect to earn about 5% less than a 45-year-old, the study says.

The researchers found that about 25% of this age gap in home sale returns can be accounted for because of older sellers’ homes requiring “substantial maintenance” or having not been renovated.

The other factor affecting returns for older sellers was the way in which they chose to sell. The researchers argue that when dealing with real estate agents, “older sellers are less likely to consider [...] incentive misalignment and information asymmetry,” such as deals where agents represent both the buyer and seller.

They also found that older sellers “are much more likely to list their property privately, meaning without using one of the Multiple Listing Services (MLS)” which is also known as “pocket listings.”

“These transactions receive substantially lower returns, and this pocket-listing discount

is much larger for older sellers than for younger ones,” the paper says, a finding that “helps explain a substantial portion of the baseline aging effects” on returns.

Replacing income

When planning for retirement, it’s important to consider the income you’ll need to maintain the lifestyle you want. If your goal was to have an income replacement ratio of 80% of pre-retirement income, you could start by seeing how close to that you’d get by calculating your estimated Social Security benefits.

If there’s a major gulf between what you’d hoped your monthly income would be and the reality of your benefit amount, consider how you’d fill it. If your plan is to downsize by selling your current home, look into the reality — get an assessment, and don’t forget to factor in all the fees and closing costs associated with selling.