Can a Home With a Lot of Equity Take the Place of an IRA for Your Retirement?

Many people struggle to save for retirement because, well, it's not easy to part with money that can be used for other things. But not saving for retirement could leave you cash-strapped as a senior, and that's a scenario you don't want to face.

But what if you own a home and you're on track to have its mortgage paid off in time for retirement? And what if your plan is to downsize your home and use the money you make from its sale to live off of?

It's not an unreasonable idea in theory. But here's why it might fail in practice.

When moving isn't so easy

Rather than fund a retirement plan during your working years, you may choose to put your money into a mortgage with the goal of owning your home outright by the time your career ends. From there, you can always downsize, bank the difference, and live off of those savings.

So for example, let's say you expect your home to be worth $1 million by the time you retire. And let's say you expect to downsize to a home that you only have to spend $250,000 on.

You could conceivably take that remaining $750,000 (a bit less if you have to pay a real estate agent commission), invest it, and then live off of that sum. And in some ways, that's really not so different from having a $750,000 IRA or 401(k) to take withdrawals from.

Here's the problem, though. When you've lived in your home for many years, leaving it can be easier said than done.

Buying a much less expensive home could mean having to move to not just a different neighborhood, but a different city. From there, you could lose your social network and the other comforts you've come to love, like the park down the street or the cafe around the corner where the person behind the counter knows your daily order by heart.

Also, while plenty of retirees do successfully downsize, you never know if finding a replacement home will be a challenge. What if there's very limited inventory at the time your retirement kicks off, kind of like there is now? What if you encounter mobility issues that make it so moving to a third-floor condo isn't as good as staying in the oversized ranch you raised your family in?

These are all points to strongly consider before you make your home and its equity your back-up plan for retirement income. You don't want to bank on selling your home, only to find that it's not as feasible as you thought it would be.

Try to save something

You may find it difficult to fund a retirement plan when you're already covering so many bills. But do try to save and invest some amount of money each month, even if it's a modest sum. Over time, it could add up to a lot.

In fact, let's say you contribute $300 a month to a retirement account over a 30-year period. If your investments in that account deliver a 10% average annual return, which is consistent with the stock market's average, at the end of that savings window, you'll be sitting on about $592,000.

Once you bring money with you into retirement, that money is yours. But it may prove harder than expected to convert a home you own into retirement income. So don't make that your go-to plan for your senior years, as it could seriously backfire on you.