The Center for Retirement Research at Boston College (CRR), in a booklet available on its website (crr.bc.edu), suggests retirees should look at their house as a source of income. The organization points out that a house is the largest store of wealth, accounting for between 67% and 83% of wealth for households age 65 or older. Thus, a house offers a method for boosting retirement income either by downsizing or through a reverse mortgage.

Moving to a cheaper house adds immediately to savings and can provide a long-term boost through future cost savings. The CRR calculates that downsizing from a house worth $250,000 to one worth $150,000 will result in after-cost proceeds of $75,000. If these proceeds are invested and 4% portfolio withdrawals are taken, yearly income will be increased by $3,000. Since the smaller house will be cheaper to own, an additional $3,250 in annual income can also be realized.

In addition to the cost savings, there are other advantages. The new house may have a better layout. It may have both fewer rooms (less upkeep) and fewer, or no, stairs. It may also be in a neighborhood better suited for a retirement lifestyle.

A reverse mortgage allows retirees to stay in their house. Federally insured home equity conversion mortgage (HECM) loans are available to homeowners age 62 or older. Since a reverse mortgage is a loan, it is tax free. It also does not affect Medicare premiums, Social Security taxes, Medicaid eligibility or Supplemental Security Income eligibility.

The amount received depends on several factors, including the value of the property, prevailing interest rates and the age(s) of the homeowner(s). The CRR estimates that on a house worth $250,000, a 65-year retiree could receive lifetime yearly payments of $8,600 net of fees. A 75-year old retiree owning the same house could get $10,700 net of fees. (These are just estimates.)

Since a reverse mortgage is a loan, however, there are risks. Failure to pay property taxes or insurance could result in foreclosure. Plus, since the loan must be paid at death, there may be little or no equity left to pass along to heirs.

Source: “Using Your House for Income in Retirement,” Center for Retirement Research at Boston College.