Dear Friends,

Let’s see if I’ve got this straight:

On the one hand, you’re not maxxing out your 401(k) contributions because you claim you can’t afford to. On the other, you think nothing of dropping a couple of hundred bucks at Home Depot to spruce up your garden, or perhaps several thousand to update your kitchen.

Admittedly, colorful beds of perennials and a prettier, more modern kitchen score significantly higher on the “instant gratification” scale compared to adding money to a somewhat mysterious account you won’t benefit from for perhaps decades.

Plus, there’s all that confusing uncertainty of what it’s going to be worth at that point, anyway.
New cabinets or a beautifully landscaped yard offer tangible, understandable results you can appreciate in the here and now as opposed to some date in the distant future.

Of course, we also rationalize these expenses by saying that they will increase the value of our home. Thus, they have the potential to deliver both current enjoyment and a future payback.

If you cash in on it.

Trouble is, few of us actually think of our homes in such a detached way, that is, as a store of accumulated wealth that we will one day use to pay for our later years.

A study commissioned by the Center for Retirement Research (click here to visit the CRR's Web site) at Boston College found that only 6 percent of individuals from 50-to-65 years old plan to tap the value of their home to cover their living expenses in retirement — either by selling it and buying a less expensive one, by taking out a reverse mortgage, or through the use of a home equity loan.

Another 22 percent aren’t sure. And the majority — nearly three-fourths of us — say we have no intention of doing so.

Click here to see table: 'Planning to Use Home Equity for Ordinary Living Expenses?'

You might not have a choice. You just don’t realize it at this point.

Alicia Munnell, the Center’s director, says that’s because it just hasn’t hit you yet. “Our findings reflect the patterns of current retirees. Those who are still working look at their parents and assume they’re going to do what they did.”

In other words, today’s pre-retirees figure, “If it worked for mom and dad, that’s the way it will work out for me, too.”

However, the reality is that the retirement picture is changing radically.

“I view the last 10 years as the 'Golden Age' of retirement,” says Munnell. “Social Security’s ‘normal’ retirement age had not yet started to increase. Many retirees still had old-fashioned defined benefit pension plans. To the extent they owned financial assets, they appreciated in the boom of the 1990s. Their homes appreciated.”

But, she cautions, the outlook for tomorrow’s retirees, including the huge baby boom generation, will be very different because “the retirement system is contracting.”

Among other things, the Social Security benefits tomorrow’s retirees will receive will replace a smaller percentage of the income individuals earned during their work lives. In addition, the age at which you are eligible to receive your “full” benefit is already increasing from 65 to 67. Those who start their benefits prior to this will see a bigger reduction in the income they receive, on the order of 25-30 percent.

In addition, says Munnell, since Medicare premiums are deducted from Social Security checks before they are sent out, “this will take a bigger and bigger chunk out of your benefits because Medicare premiums are growing faster than Social Security benefits.”

In the future, more and more retirees will see their Social Security income subject to income tax because the thresholds that determine this were established in the early 1980s and have never been adjusted for inflation.

And that’s just one leg of the so-called “Three-Legged Stool” of retirement income. The other two are also pretty shaky.

Take employer-provided retirement income. There has been a steady trend away from defined benefit plans, which put the burden on the employer, to defined contribution plans, where the employee is responsible for investing his/her retirement savings and knowing what withdrawal rate can be sustained.

As for the third leg of the stool, personal savings. We’ve heard for more than two decades that we, as individuals, have to pick up the slack by saving more. Few of us have paid any heed.

Sure, part of the reason is good old American consumption patterns and our consumer-driven society. But Munnell believes another factor is human nature: when you look at folks who are retired today most appear to be doing quite well. “So it’s hard to convince people that it’s going to be worse in the future,” she says.

It’s like trying to get people to believe there’s a hurricane headed their way when the sun’s still shining and there’s not a cloud in the sky.

Overwhelmingly and understandably, retirees don’t want to leave the homes they have lived in for years. This is where you raised your children, you know your neighbors, you hung the wallpaper, planted the seedling that grew into a mighty oak, buried the family dog in the backyard, worked for decades to pay down the mortgage, etc.

In short, our homes are not only storehouses of wealth, they are also full of memories. We are attached to them both emotionally and psychologically.

When asked what they intended to do with their homes if they didn’t plan to tap the equity in them to pay for living expenses, 44 percent of pre-retirees said they would use them as a form of “insurance,” and only sell or re-finance them if they needed money to pay for unexpected and large expenses, such as medical bills.

If their home equity wasn’t used for that, they wanted to leave them to either their children or a charity.

Munnell has her doubts about this happening. For most of us, our home represents the second-largest asset we own. Due to longer life expectancies and increasing uncertainty about other sources of retirement income, she warns we may not have a choice about cashing in on your home’s equity.

Click here to see table: 'Wealth Holdings of a Typical Household Prior to Retirement.'

“The problem is that people are just not going to get as much money from either private or public pension systems as in the past. They’re going to feel strapped. They’ll be forced to tap their homes as a source of support in retirement,” she said.

“I’m afraid people are going to have to use [the value in] their homes. This just hasn’t entered their consciousness yet.”

It’s time to think about this.



If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.