Are you getting older without a lot of money saved for retirement, but with a home you own? If this sounds like you, you fit a profile that's very common in America.

According to the Center for Retirement Research at Boston College, there are so many American seniors with homes but no savings that the third leg of the traditional "three-legged" stool meant to support retirement may include housing, not private savings, as a supplement to Social Security and pension income.

Seniors, in fact, have so much equity tied up in their homes that median household income would increase by more than one-third if the equity in homes was completely monetized. Further, tapping into housing equity could cause a substantial reduction in the share of older adults living in relative poverty with incomes at or below 50% of medians.

Yet, despite the apparent benefits, impediments to tapping into equity have resulted in few seniors using their homes to increase incomes.

A house inside a bubble being held in someone's hands.

Image source: Getty Images.

Why is home equity a poor substitute for retirement savings?

There are a few key reasons why home equity is an inadequate substitute for retirement savings, despite the impact monetizing homes could have on the economic security of senior Americans. Problems include:

  • High costs associated with withdrawing home equity
  • Uncertainty about life expectancy and the necessary financial resources required to fund retirement
  • Potential loss of access to social benefits
  • An aversion to accumulating debt in old age
  • Emotional attachment to housing that does not exist with other types of wealth
  • A desire to leave a house to loved ones
  • A lack of trust in financial institutions
  • An unequal distribution of housing wealth: Because housing wealth is concentrated in middle and upper class households, which are more likely to have savings, monetizing home equity would still result in a higher share of poorer seniors in the U.S. than in Europe. 

These obstacles to monetizing home equity make clear the inherent problems in considering housing wealth as the third leg in the three-legged stool.

Yet, for seniors who have reached their retirement years without savings, monetizing home equity could play a vital role in supplementing retirement income and responding to unexpected and expensive life events.

How can you tap into your equity as a senior?

Because the Center for Retirement Research concluded that home equity is an inadequate substitute for retirement savings due to barriers to monetizing homes. Those who are still in the workforce should prioritize making investments with the goal of saving at least 20% of their income

However, for seniors in retirement already with too little savings, there are a number of options for tapping equity to buy more financial security. Options include:

  • Taking a home equity loan: Downsides to this option include potentially substantial closing costs, ongoing loan payments with interest, risk of losing the home, and uncertainty regarding how long borrowed funds will support you during retirement.
  • Taking a reverse mortgageReverse mortgages are geared toward helping seniors effectively use their housing wealth as a source of retirement income. No payments are made while living in the home, and loan payments may be disbursed as a lump sum, line of credit, or lifetime income. Downsides include an inability to pass a home on to heirs, higher closing costs and interest compared with traditional mortgages, and an inability to change loan terms or allow a family member to assume the mortgage.
  • Selling a home: Selling a home, investing the equity, and moving to a lower cost of living area or a lower priced home allows seniors to free up equity to invest and live on. Downsides include high transaction costs, including realtor commissions and closing cost, and an inability to pass the home on to heirs. However, if you purchased a lower-price home, that home could be part of your estate.

What's the right choice for you?

Ultimately, every senior will need to decide what the best approach to funding retirement is -- but for many seniors whose home is their only substantial source of wealth, finding some way to tap into home equity may not be optimal when they discover they cannot live on Social Security alone. Consider the different options for tapping into equity carefully to make the right choice.