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Family Finance


Can You Relly on your Home for your Retirement Nest Egg?



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02/01/2010 - Like many homeowners, your house is probably the biggest investment on your personal balance sheet. So you might wonder, with all that's changed in the economic turmoil of the last few years—the Wall Street collapse, the housing boom and bust, cuts to employee pensions and 401(k) accounts—what your house is worth now and if you can rely on it as a retirement nest egg in the future. Here are a few things to keep in mind.

Counting on your home to provide a source of income in retirement is not without risk. Though home values historically have risen over time, they sometimes fall unexpectedly, leaving you at the mercy of the marketplace. The recent real estate crash is evidence enough that home values are subject to fluctuation.

In general, however, once you pay off your mortgage, and assuming your property is well-maintained, your home will be a valuable asset. To get a feel for its current worth, do an honest assessment of it relative to houses that are for sale in the neighborhood. Take note of resale rates and other neighborhood trends that could affect home values. If you're looking for a more precise figure, consider hiring a professional to assess your home's value.

If you do decide to use your house as a source of income when you retire, then you have two basic choices:

You can sell your home at the current market value. With the proceeds, you can invest and draw a monthly salary. This is probably only a good option if you are looking to downsize from a large or expensive home into something more modest. Even in that scenario, however, you should keep in mind that expenses related to renting or buying a new place to live could take a heavy bite out of the sale.

You can consider taking out a reverse mortgage (if you qualify). A reverse mortgage is a government-run program that allows homeowners to stay in their homes while accessing a portion of the value of their property. You can choose to receive a lump sum, monthly payments or open a line of credit based on available equity. The cash you receive can be used as you wish (whether to pay for daily expenses, make home improvements or whatever else). As long as you and your spouse are living and remain in the home, the reverse mortgage does not have to be repaid, so you are not at risk of losing your property. There are several downsides however. First, reverse mortgage loans are expensive, with relatively high closing costs and interest rates. Second, your heirs will not receive the full value of your home when you leave the property or die and they may be required to sell the home to repay the mortgage. While you are not required to make payments on a reverse mortgage during your lifetime, you are still responsible for homeowner's insurance and property taxes. Generally speaking, if you plan to stay in your home less than three years, the cost of a reverse mortgage may outweigh other more affordable options, including a home equity loan.

Using your home as a source of retirement income is a last-resort option and shouldn't be the cornerstone of your retirement plan if you still have time to change course and actively save for your retirement. Enlist the help of a financial advisor to assess your personal financial situation and take steps to aggressively save for the future. With regular contributions to a tax-advantaged retirement account, you can make steady progress toward your financial goals, especially when you have time on your side and can reap the benefits of compounding. Whether or not you eventually need to tap your home's value to make ends meet, your efforts to plan and manage your finances today will be a reward in itself and equip you with the information you need to take control of your financial future.

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Neither Ameriprise Financial nor its affiliates or representatives may provide tax or legal advice. Consult your tax or legal advisors concerning your situation.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

©2009 Ameriprise Financial, Inc. All rights reserved.

File # 94225

(12/09)

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