Home equity: A powerful tool for retirement security

Vanguard research shows that outside the top 30% of income earners, many baby boomers are likely to fall short of their retirement savings goals. Part of the reason for the inadequate savings is that the transition from defined benefit (DB) to defined contribution (DC) retirement plans occurred during their peak earning years, such that they did not fully benefit from either system. A typical baby boomer earning $56,000 is projected to retire with $120,000 in net worth excluding home equity and face an annual spending shortfall of $9,000, or about 24% less than what’s needed to maintain their lifestyle.

Faced with this challenge, baby boomers may need to consider creative solutions to bridge the gap. One important but often overlooked option is unlocking home equity—turning housing wealth into income to help close the spending gap. For many, home equity is not just a safety net. It’s a powerful financial lever for the 85% of baby boomers who own their own homes.

If retirees were to extract the full value of their home equity by selling their home and renting in retirement—an option that may be hard to fathom but could be necessary to narrow the funding gap—Vanguard estimates that retirement readiness among baby boomers would increase by 20 percentage points, with 60% on track to maintain their lifestyle. This improvement is especially significant for lower-income baby boomers, whose wealth is often concentrated in their homes rather than in retirement savings accounts. For instance, those in the 15th percentile of income (earning $22,000 per year) have 3.8 times their annual income locked away in home equity. Compare that to those in the 95th percentile of income (earning $196,000 per year), who have 1.1 times their annual income in home equity. 

“Home equity, if used wisely to fund retirement, can make a meaningful difference for retirees who are worried about making ends meet,” said Kelly Hahn, Vanguard’s head of retirement research. “It’s often the largest asset people have and tapping it can help fill important gaps in retirement income.”

Home prices climbed 31% in real terms from 2019 to 2024, making the idea of utilizing home equity more attractive than ever. Of course, local market conditions matter, and not every region has seen the same gains. Before deciding whether and how to use home equity, it’s important to evaluate potential risks and personal considerations. 

Unlocking home equity can offer meaningful benefits in retirement, but it’s not without trade-offs. Both financial and personal factors warrant careful consideration, including:

• Emotional attachment. For many, a home is more than just an asset. Deciding to sell or relocate can be a challenging and emotional process.
• Market conditions. The effectiveness of tapping home equity depends on the housing market. Recent price appreciation has made selling more attractive, but higher mortgage rates, rising rental costs, and weaker demand in some regions could offset potential gains.
• Cost comparisons. Downsizing or relocating may not cover an entire retirement shortfall, especially if rental costs are high or mortgage rates have increased.
• Individual circumstances. Every retiree’s situation is unique, and no solution applies to everyone. Financial needs, lifestyle preferences, and emotional priorities should all be considered.

“For many retirees, home equity can help bridge income gaps—but it’s not just about the numbers,” said Hahn. “You have to think about what’s happening in the housing market, your own needs, and how attached you are to your home.”

Given these considerations, retirees have several options for putting home equity to work to support their retirement security.

Retirees today have a range of approaches to convert home equity into retirement income. Each offers distinct benefits and considerations, so it’s important to identify the strategy that best fits one’s individual circumstances and financial goals. An expert can help retirees think through these options. Possible approaches include:

• Downsizing. Transitioning to a smaller house can reduce living expenses and free up some capital, though it may not fully cover the savings shortfall. The emotional and logistical challenges of leaving a long-time residence, along with the costs of buying and moving, should be carefully considered.
• Relocating. Moving to an area with a lower cost of living can help stretch retirement funds, but it may also mean leaving behind familiar communities, health care providers, or support networks.
• Selling and renting. This approach can provide full access to home equity and thus more flexibility, yet rising rental costs and the lack of long-term housing security may offset some of the financial gains.
• Reverse mortgage. For those who prefer to stay put, a reverse mortgage allows a homeowner to access home equity without selling. However, these transactions can be complex.

When chosen thoughtfully, these strategies can help many baby boomers address retirement income gaps and achieve greater financial security.

“Home equity isn’t just a backup plan. It can be the difference between falling short and achieving long-term financial stability for baby boomers facing a retirement savings shortfall,” said Hahn. “With careful planning and a clear understanding of the options and potential risks, leveraging a home’s value can help transform hard-earned assets into a more comfortable retirement.”