What Are We Saving For? Using assets in retirement
If we had saved $400,000 through our lifetime why wouldn’t we use the money to make our retirement years more enjoyable and comfortable? Many older people are sitting on funds of this order in the value of their mortgage-free homes.
Mobilising wealth tied up in housing
Home ownership can be a source of additional income if it can be mobilised and the owners are willing to do so, even though this type of wealth is less flexible than cash assets, bank deposits, bonds, and shares.
How can it be done?
Preserve or mobilise
First of all, people must decide if they want to preserve funds tied up in housing or mobilise them in some way (see the table below). Most people do nothing and by default their capitalis kept intact, probably growing as house values increase. In this case, the equity is preserved for inheritance after the owners die. I will come back to this option.
Home equity also can be used (for example, as security for a loan) when a special need arises, such as medical emergencies; perhaps paying for surgery in a private hospital rather than suffering pain for months on a waiting list. Or financial difficulties facing family members – a marriage breakdown, business failure,redundancy, sudden death or illness. This approach may be described as ‘saving it for a rainy day’.
Less dramatically, older people may wish to assist their grandchildren to buy a house or undertake tertiary education. In some situations, home equity may be required to pay for long-term residential care, but that is a separate story.
Options for using housing wealth
|Sale||Intensify use||Equity conversion||For a rainy day||Inheritance|
|Trade down||Share||Mortgage||Residential or home care|
|Rent||Convert||Home reversion||Assistance to family|
|Share||Build on||Reverse mortgage||Emergency use|
Releasing housing wealth
On the “mobilise’ side of the table the first decision for older people is whether to remain in their home. If the family home is sold, part of the capital may be released by ‘trading down’ to cheaper housing, perhaps an apartment, more suited to the needs of a smaller household. Moving into a retirement village will also often have this effect. Many people successfully trade down in, or approaching, retirement.
By selling, all of the home equity is released to spend or reinvest. But this means that the former owners must find somewhere else to live, incurring the costs of renting or boarding. They will have to balance returns from investing the house sale proceeds against the costs of alternative accommodation. Renting removes the burden of home maintenance, but can bring reduced security of tenure, rent increases, and less freedom to alter the housing to their tastes.
Moving in as a boarder with family members can provide care and support as well as accommodation. It could be an alternative to residential care and will preserve capital for inheritance. However, this does not appear to be a favoured option; 80% of people aged 65 and over live either alone or in couple-only households. The downside of moving in with family members includes loss of autonomy and potential family problems.
Several other options allow owners to remain where they are, in familiar home and community surroundings. They can share – taking in boarders or flatmates. Large family homes may be converted into flats, possibly using lump sums available at retirement, or maturing investments. These choices bring the responsibility and problems of being a landlord. Where a section is big enough, subdivision may be possible, with surplus land to sell or, if funds available, to build a new unit or units for rent.
Finally, people may stay in their homes and borrow against the equity. A new mortgage may not be attractive (and may not be available to people over a certain age) as this means repayments of capital and interest, or interest only. But there are now a range of commercial “equity release” schemes. These have their advantages and disadvantages but do present other options for older people who are “housing rich but income poor”.
I will talk about these next.
Dr Judith A. Davey
Age Concern New Zealand voluntary policy advisor
Senior Research Associate, Institute for Governance and Policy Studies, Victoria University of Wellington