Retirement Planning

Retirement is a frightening thought for many as they wonder how they will survive. One source of comfort is your own home. The equity in your home could be a major asset, especially if you have paid the mortgage down and especially if you've paid it off. If you're approaching retirement, there are two ways to take advantage of your home's equity. First, you can use a "reverse mortgage" which allows the lender to make monthly payments to you from the equity. Second, you can "trade down." Trading down means selling your home and replacing it with a smaller, less expensive home, and then keeping the extra as retirement. This amount will vary depending on the sell price of your current home, the price of the new, smaller home, and the other associated costs involved in the transactions. First you should check the estimate of your current home's value from several real estate agents, and then explore what costs will be associated with the sale and purchase of another home. This will give you an approximate net gain. Many fear that trading down will subject them to capital gains taxes. Don't be mistaken about this. You can exclude from federal taxes up to $250k of any capital gain (double if you're married and file jointly). To qualify for this, you must merely use the home as your primary residence for two out of five years before the time of sale. The reality is that the benefits of trading down often outweigh the losses. By downsizing your home, you will save on heating, cooling, real estate taxes, insurance and maintenance. Potential drawbacks to downsizing are that you will have to live in a smaller space. For some, this is too great a sacrifice, often requiring you to throw things out. You may also frown at the idea of moving away from social networks and family roots. As you can see, however, none of these drawbacks are monetarily detrimental.