Most are under-saved, overconfident, and over-invested in homes, and a drop in home prices could derail a lot of people’s plans
SAN FRANCISCO, Jan. 30, 2020 /PRNewswire/ — When it comes to retirement, misplaced confidence is high among American homeowners, Unison’s “State of the American Homeowner” survey found.
“For many American homeowners, the home is their largest financial asset and should therefore be at the core of their financial planning, including planning for retirement. But most homeowners don’t understand how to appropriately include this major asset, and the risk that comes with it, in planning for the future,” CEO Thomas Sponholtz commented. “The extent to which homeowners, especially baby boomers, are financially underprepared for retirement is a concern. And the problem cannot be solved without including the home in financial plans.”
Undersaved but Overconfident
Almost half (48%) of American homeowners say they plan to retire in their 60s. Another 9% plan to do so during their 50s, and 22% plan on their 70s; 5% say they’ll never retire, and 11% don’t know. More than two-thirds (68%) of American homeowners are “confident” or “very confident” in the amount of money/assets they have saved to fund their retirement, but the numbers they report don’t support their optimism.
- One in five homeowners (19%) say they don’t know how much they need to have saved by the time they retire in order to feel secure and live comfortably in retirement, and more than one-fourth of homeowners (28%) don’t know how much annual income the assets currently in their financial portfolio will generate when they retire.
- Half (47%) have currently saved around $250k or less, and 35% say they would be comfortable with amounts less than $750k total saved by the time they retire. This is in sharp contrast to what retirement experts recommend they actually need, and while $1M has long been a benchmark for secure retirement, many experts now say Americans should be saving far more, and some studies show that as many as one in three retiring Americans will find themselves in or near poverty in the next 10 years.
Overinvested in Their Homes
The vast majority of American homeowners (90%) think of their home more as a financial asset than a financial burden, and homes figure prominently in their financial portfolios, but almost a quarter (23%) of those who say it’s an asset don’t yet know how they will use it.
A quarter of American homeowners (26%) say more than half their total net worth is tied up in their home while 32% say their home represents from a quarter up to half their total net worth. An additional 28% say 5 to 25% of their net worth is tied up in their home.
Banking on Home For Retirement
Homes also figure prominently in Americans’ retirement planning. A quarter of American homeowners (25%) are planning to use their home as an asset to fund their retirement. Forty-two percent of those say their home is one of the top four most important ingredients in their retirement plan, and one in 10 of those say it’s the biggest part of their retirement plan.
Among those who are planning to sell their home or tap their home’s equity to fund their retirement, home equity represents a big chunk of their retirement nest egg. Of these, 17% say their home represents half or more of their retirement nest egg; 38% say their home represents 26-50% of their retirement nest egg; another 35% say it represents 5-25%.
Among those planning to sell their home to fund their retirement, 38% say they’ll move to a less expensive area with a lower cost of living. 21% say they’ll purchase a smaller home nearby, and 12% will move to a retirement home or community. 7% plan to rent, and 4% say they’ll move to a less expensive country. Only 1% plan to live with a child, and 14% don’t know yet what they will do.
Planning on Home Price Appreciation
Homeowners are generally optimistic about home prices. Almost three-fourths of homeowners (70%) think their house will be worth more by the time they retire: 35% think it will be worth 10% more, another 25% think it will be worth 25% more, and an optimistic 8% think it will be worth 50% more. Just 12% of people think their house will be worth the same when they retire as it’s worth today, and only 4% think the value might decrease.
- Almost two-thirds (64%) of people planning on a value increase in their home before retirement say that expected increase is important to their plan to retire. One in five (19%) say it’s very important, and 2% say that without that expected increase in home value they’ll be unable to retire.
- While 61% of Americans say a 25% drop in home values wouldn’t impact their retirement plans at all, it would delay retirement for the other 39%: 19% say that if their home dropped 25% in value, they’d have to delay their retirement by a year or two, 13% by about 5 years, 3% by about 10 years, and 3% say they’d be unable to retire.
Most homeowners think about their home’s value first in non-monetary terms. A quarter of homeowners (25%) say they value their home’s potential as a financial asset/nest egg as one of the top 3 most important things, but this is lower than the emotional value homeowners see from its role as a place for family to come home and gather (34%) and memories made in the home (31%).
- 43% of American homeowners say owning a home makes them feel secure – it’s a big financial asset. A third (34%) say it makes them feel stable (“you can’t raise the rent on my home”) and another 15% say it makes them feel successful (“I am financially well off”). Only 4% say it makes them feel pressured (“I can barely make the monthly payment”); another 4% say vulnerable (“It’s a big expense”).
- And most homeowners (58%) are emotionally attached to their home, with 10% saying they are very attached and selling their home would break their heart.
Despite some mixed feelings, Americans still say “buy!” An overwhelming 93% of current American homeowners would recommend a prospective home buyer buy a home: 41% would say “definitely” buy a home, and 52% would say “probably” buy a home.
Counting on Vanishing Solutions
American homeowners are counting on retirement solutions that may not be available by the time they get there.
- 70% of American homeowners are planning to fund their retirement via Social Security – yet by some estimates, the social security trust fund will run out of money by 2035.
- 42% of American homeowners are counting on a pension. Yet private-sector pension coverage fell by half over the two decades from the early 90s to the early 2010s. And between defaults and buyouts, even those who do have traditional pension plans may not reap the financial benefits they expect.
Sponholtz noted, “In the United States, if there’s $30 trillion dollars of residential real estate, about $15 trillion is mortgaged and about $15 trillion is equity owned by 132 million individual homeowners. Imagine if you make that $15 trillion of equity that’s locked up in homes liquid, so that equity becomes part of the homeowner’s active net worth. That could unlock the biggest component of the U.S. economy, and at Unison, it’s what we’re striving toward.”