Are You Overlooking Your Most Valuable Retirement Asset?

Selling your home and relocating could become a bigger part of the retirement conversation, given how real estate markets have boomed over the last decade.

Four progressively taller stacks of coins with a small home sitting on the tallest stack.
(Image credit: Getty Images)

Housing wealth as a source of retirement funding is often overlooked, even though it can play a key role in funding a secure retirement.

According to recent Vanguard research, about 80% of Americans over the age of 60 are homeowners, and housing wealth accounts for nearly half of their median net worth. This could mean that many homeowners nearing retirement are, in fact, sitting on (or, rather, sleeping in) a significant amount of potential retirement income.

While many homeowners choose to age in place or pass the home down to family as a wealth transfer strategy, for those looking to relocate — whether for nicer weather, proximity to family, lower state taxes in retirement or to downsize and decrease maintenance responsibilities — selling a primary home and moving to a less expensive market can provide a significant source of funding for retirement.

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The key to capitalizing on housing wealth is a strong understanding of real estate trends, a strategic tax strategy and a solid retirement plan — a financial adviser can help with all of that. However, below are a few things to keep in mind when considering this strategy.

Location, location, location

Our research found that moving out of major coastal states likely offers the greatest opportunity for wealth extraction, particularly for those relocating from California, Washington, D.C., Massachusetts, Washington state and Oregon. These relocators are known as “lottery winners,” as their homes are in booming markets and have appreciated at higher rates than the national average.

On the other hand, those selling and relocating from low-growth housing markets, such as Oklahoma, the Dakotas, West Virginia and Mississippi, may need to inject additional funds into their new home if relocating to a booming housing market. However, these and other relocators can still cash out if they move to an even lower-growth market than the one in which they reside. These relocators are known as “bargain hunters.”

We’ve found that among people who retire and relocate, about 60% move to a less expensive housing market, allowing them to unlock about $100,000 of home equity from their previous home.

Of note, a move doesn’t have to cross state borders to result in a significant cash-out. For example, imagine a 65-year-old resident of Santa Clara, Calif., where average house prices were $1,214,000 (as of 2022). Moving to Merced, the neighboring county where the average prices were $380,000, could unlock up to $834,000 in home equity, provided they own the Santa Clara house and pay for the Merced house in cash.

Furthermore, selling additional properties, such as investment properties or vacation homes, can further this real-estate-focused retirement strategy by potentially unlocking even more equity.

Understanding local and national housing trends is critical for the success of this strategy, and I encourage consulting with both a Realtor and a financial adviser to help inform your decision. Collectively, they can help potential sellers understand changes in national and regional housing trends, calculate how much a home could realistically sell for, consider tax implications, and manage expectations for home prices and maintenance costs in a new market.

They can also help those with multiple properties to conduct a portfolio analysis that compares the costs of maintaining these properties and their future growth outlook vs. the income and growth generated from investment of the after-tax sale proceeds to see which scenario provides more financial benefit.

What to do with all that cash?

So, you’re sold? Now, what to do with all that cash…

Remember that home sellers will have to pay capital gains taxes on this gain and therefore should ensure they have enough cash on hand when they file taxes and for any moving expenses or closing costs.

If retirement is still far off, consider putting the cash toward existing retirement accounts when available. For those who are already retired, consider investing the money into taxable accounts. As with any aspect of a financial plan, having a strategy for this money is imperative, and a financial adviser can help you assess your options. This includes mapping out how the cash influx may impact progress toward retirement and long-term goals, how to update estate documents to meet new state requirements and your current wealth transfer plan and how to prove residency for tax domicile purposes.

Although the retire-and-relocate strategy has been generally overlooked, I suspect it will become a more frequent aspect of the retirement conversation, given how real estate markets have boomed over the last 10 years. As we approach summer, the most popular time for buying a home, I encourage discussing this strategy with your financial adviser if you’re nearing retirement and considering relocating.

Don’t forget that the recipe for retirement readiness is comprised of a variety of methods, including starting early, maintaining a long-term perspective, increasing retirement contributions annually and taking advantage of compounding returns. Everything else is just the cherry on top.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Julie Virta, CFP®, CFA, CTFA
Senior Financial Adviser, Vanguard

Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.