How Housing Can Play An Important Role In Retirement Security
When saving for retirement, people might focus on earning their employer’s 401(k) match or maxing out their Roth IRA. However, for some people, part of their retirement nest egg could come from tapping into their home equity.
Kevin Khang, a Senior International Economist at investment advisor Vanguard, found that some people can use their home equity to fund their retirement by relocating to a more affordable home in their later years.
Investopedia talked to Khang about why housing is an important part of retirement wealth, how people can think about relocating in the current housing market, and whether buying a home in an expensive city is still a good investment. The interview has been edited for brevity and clarity.
INVESTOPEDIA: Your research focuses on people who sell their homes and relocate to different places when they retire. Why is relocating considered financially beneficial for retirees?
KEVIN KHANG: You would hear about all of these people who built a life in the Northeast, sold their small business, and then sold their house for maybe $2 million because the housing market was extremely strong.
Once I heard a few of those stories, I wondered if there was something more systematic happening. It’s natural for people to look at their housing as a potential source of retirement [wealth]. It turns out the [benefit] is pretty big—the [cash] extracted [from relocating] is around $100,000.
It’s common in financial advice to not look at housing wealth as a source of wealth. But at some point, things change. The dynamics of housing markets have changed over the last 30 years, and some people learned that they actually have a lot of wealth they can tap into at the right time.
INV: In the current housing market—where mortgage rates are high and housing supply is low—who should consider relocating for retirement?
KHANG: Let me talk about the housing market first. The current housing market is tricky. There’s not a lot of supply. There is sufficient demand… What you see is housing prices standing still.
The data shows that those in their 60s are really the ones taking advantage of this. The way people do it is by finding a bargain. Let’s say if you sell in Pennsylvania, you then look for the most economically viable place where you can maximize [your earnings from that home sale] and relocate.
People who can stay in their homes tend to hold out until the timing is right. These people tend to show up in droves when the housing market is strong.
INV: As you noted, home prices in northeastern cities, like New York, have skyrocketed. Is it still a good investment to buy homes in these pricey cities?
KHANG: If you look at the housing market return over a century, it actually just keeps pace with inflation. Over the past 20 or 30 years, that isn’t true for some local housing markets. These superstar cities may continue to appreciate at a higher rate or they may not.
I’ll offer San Francisco as an example. Before COVID-19, people thought that the housing market in San Francisco was like buying into the Magnificent 7 stocks. With the pandemic came the reality that a hybrid working model is here to stay.
If people don’t have to come into the office all five days, employers don’t need to spend money on those spaces. There’s a structural decline in demand for [commercial spaces] in cities where these companies were expected to pay a lot of property taxes. That’s a big tsunami playing out in those cities.
There’s actually a more diverse source of risks when it comes to whether a given locale’s price trend will continue.
