How to use home equity to fund retirement

Often, it's not on the radar screen - but it should be for millions of retirees

Mention the idea of tapping home equity to fund retirement, and people often think you’re suggesting a reverse mortgage.

But a reverse mortgage is only one option—and more people should be considering ways to extract value from their homes in retirement.

Half of all households face the risk of a declining standard of living in retirement. The reasons are many - I detail them in my book Retirement Reboot. But the main causes include the decline of traditional pensions, lower Social Security replacement rates and economic conditions that have made it difficult for many to save for retirement.

Yet the majority of older Americans are homeowners—and most of these households have more home equity than financial assets.

Home equity is the current market value of your home minus any remaining mortgage obligation. Your home is an investment, but it’s a bit different than other financial assets. It’s less liquid and more complex to tap, and it provides shelter and meets other human needs.

Households with inadequate savings stand to benefit most from tapping housing wealth, but everyone faces longevity risk—that is, the risk that you’ll outlive your savings and potentially need to lower your standard of living late in life. Home equity can play a role in protecting against that risk.

In my new Morningstar column, I explore ways to tap home equity in retirement.

Runaway federal spending on Medicare - it’s not happening

“Medicare and Social Security are bankrupting the country.”

It’s one of those statements that’s been repeated so often you just have to think it’s true. But it’s not. Social Security is a self-financing program currently in need of a tax hike, as I’ve explained. Now, the New York Times weighs in with a detailed analysis of the long-term trend in federal spending on Medicare.

Here’s what the Times found:

Something strange has been happening in this giant federal program. Instead of growing and growing, as it always had before, spending per Medicare beneficiary has nearly leveled off over more than a decade.

The trend can be a little hard to see because, as baby boomers have aged, the number of people using Medicare has grown. But it has had enormous consequences for federal spending. Budget news often sounds apocalyptic, but the Medicare trend has been unexpectedly good for federal spending, saving taxpayers a huge amount relative to projections.

“Without a doubt, this is the most important thing that has happened to the federal budget in the last 20 years,” said David Cutler, a professor of health policy and medicine at Harvard, who helped the Obama White House develop the Affordable Care Act.

The reason for the per-person slowdown is a bit of a mystery. Scholars have been arguing about it for years, but no one seems sure enough to confidently predict whether it is likely to stick around for much longer.

My friend and colleague Merrill Goozner doesn’t think the reasons for the trend are all that murky. The secret sauce, he notes, is that Medicare sets the prices it is willing to pay - and the result is cost-shifting to private sector employer health insurance plans.

Medicare grabbed headlines last month when it announced its first list of drugs that will be subject to negotiation under the Inflation Reduction Act (IRA). The impact of those negotiations will play out over many years, and the pharmaceutical industry will fight the government tooth and nail.

For seniors, the most immediate impact of the IRA will be the $2,000 hard cap on out-of-pocket spending in Part D plans that takes effect in 2025. Unfortunately, that cap doesn’t cover drugs administered by health care providers - and new blockbuster drugs for diseases such as Alzheimer’s could prove very expensive for Medicare enrollees.

What I’m reading

Long COVID poses special risks for seniors . . . Democrats can end poverty in America by fixing this one program . . . IRS delays new Roth 401(k) contributions rule . . . Grandparents might give more under 529 savings plan change.