'Underappreciated channel' vital source of retirement funding

Vanguard poll reveals how tactic can provide valuable liquidity

'Underappreciated channel' vital source of retirement funding

Moving to a more inexpensive housing market might provide one in four U.S. retirees with a sizable financial gain over the next 10 years. According to Vanguard's recent in-depth analysis, relocating to a lower property market is an "underappreciated channel" that former retirees have used to access home wealth as a significant source of retirement funds.

This tactic may be more important than ever, though, given long-term trends in the US housing market. Vanguard reports that 60% of retirees who moved recently had significant financial gains from the move, often taking out around $100,000 of home equity.

In Vanguard's perspective, there are two different kinds of relocations. Vanguard compares seniors transferring from soaring housing markets to more inexpensive ones to "lottery winners" and those shifting to low-growth housing markets to "bargain hunters."

The study reveals that relocation lottery winners are more prominent around housing cycle peaks and that bargain seekers are more prevalent at housing cycle troughs. In any scenario, retirees may experience a large cash windfall.

Additionally, unlocking home equity by moving to a less costly property market can be a crucial source of retirement money, possibly enough to make or break a retired couple's contingency fund. Vanguard found that retirees who effectively employ this method frequently also see a significant decline in their cost of living, allowing any windfall to be put to even better use in retirement.

Yet, the percentage of lottery winners among retirees moving decreases significantly, approaching 20%, during home market downturns. The gap is filled by the bargain hunters who earn equity by relocating to an area with a poorer historical growth in the home market.

In the end, the results of retiring and moving depend on the time of the move in relation to the national housing market cycle and the disparity in housing market growth between the origin and the destination for all homeowners.

What the next 10 years may hold

Whatever happens after the Great Recession, according to Vanguard's analysis, the time since has been "highly unusual." This is based on a detailed examination of how local housing markets have changed over the last 40 years.

If the past trend were to repeat itself, a preferred retirement location would very well cost more than it would otherwise, especially if it becomes well-liked and has more appreciation than the one the retiree's present home does. Vanguard claims that this dynamic may result in a rise in receptive behaviours, such as more adaptability, among people who must prioritize using home equity. Selling and renting in the present pre-retirement location would "lock it in," at least for a few years.

In the end, home equity is one of the most common and frequently the largest source of wealth for American households approaching retirement, but there hasn't been a lot of attention paid to how to use this wealth.

“Our results challenge the narrative that housing wealth is off-limits to most retirees,” the authors suggest. “A natural avenue for future research is to incorporate the retire-and-relocate strategy when assessing retirement readiness across the country.”