Downsizing is an often overlooked way to shore up retirement funding, according to a recent Vanguard Group report titled, “Home is where retirement funding is.”
Despite its prominence on most retirees’ balance sheets, the role of housing wealth in funding retirement has not been fully understood, claims the report, which shows about 25% of U.S. retirees sell their homes and relocate to somewhere cheaper over any given 10-year period. Roughly 60% of movers age 60 and above move to a cheaper housing market.
About 25% of U.S. retirees sell their homes and relocate to somewhere cheaper over any given 10-year period
The Vanguard paper assesses how much retirement funding could be unlocked by homeowners who relocate to a less-expensive housing market—a strategy the paper’s authors refer to as “retire-and-relocate.”
According to the paper, the median homeowner age 60 or older using this technique could have accessed about $99,000 in home equity; the figure rises to $347,000 at the top 10th percentile. “Since this average homeowner in that age group holds $223,000 of retirement savings in financial accounts, the additional funding could be mission-critical to a secure retirement,” the paper states.
The authors highlight two types of relocators: those who move from a booming housing market (“lottery winners”) and those who move to a low-growth housing market (“bargain hunters”). Lottery winners show up more prominently near the peaks of housing cycles while bargain hunters appear mostly during the troughs.
As far as which states are most ripe for “retire-and-relocate” cashing out strategies, the report tabs Hawaii (116%), California (77%) and Colorado (73%) as the states with the highest potential for extraction, with the ratios computed for individuals age 60 and over who moved to a different state or different county in the same state in 2019. Each state reports the average ratio between home equity extracted or injected and the destination house price of all non-local movers originating from the state. Notably, Washington D.C. had a 174% ratio, while no other state among the 50 cracked 60% (Massachusetts was fourth at 59%).
A recent study from Lending Tree found that it takes more than $1 million to retire with an average lifestyle in nearly 40% of the 384 U.S. metros studied—or in 147 of them. And 12 of the 20 metros that require the biggest nest eggs for retirees are in California. A retiree in San Francisco needs a nest egg of $1,365,870 on average—the highest total across the U.S. The average annual spend for a retiree in San Francisco is pegged at $64,545.
An example from the Vanguard paper considers a 65-year-old California resident with a primary residence in Santa Clara who relocates to Merced, an adjacent county in the same state, upon retirement in 2019. The average house prices in 2019 were $596,000 in Santa Clara and $266,000 in Merced. Assuming full ownership of the Santa Clara house and no mortgage financing for the new house, the authors estimate that this relocation would unlock $330,000 in home equity.
“Our results challenge the narrative that housing wealth is off-limits to most retirees and highlights a previously underappreciated channel: relocation to a cheaper housing market,” the paper concludes.
Read the full Vanguard research paper here.
SEE ALSO:
• Most Expensive Cities to Retire: Where $1 Million Isn’t Enough (And Where it Is)
• 10 Best and Worst States to Retire 2023: WalletHub
• 11 Best Places to Retire in the World in 2023: International Living
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
