MIT Professor Says You’ve Been Thinking About Home Equity Wrong

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A growing number of top financial minds are calling on Americans to wake up to a better way of thinking about their home equity. Top economists recognize that retiring unprepared is the number one threat to the world today. Pew Research reveals 10,000 boomers are retiring each day. According to Vanguard, the median amount saved in a 401k is now $72,845 by the time they are 65. That’s great news. Yet, a large percentage of the population has less than $1,000 saved, and you’ll probably need substantially more than a million dollars to be able to afford to retire. We’ve recently seen great growth in home equity. This is great news, but most it is captive equity, which is useless, or underutilized at best. So how can home equity be better used to solve the crisis?

Savvy Individuals Won’t Sandbag Their Home Equity Forever

MIT and Harvard professor Robert Merton, and a growing band of other top financial minds, are proclaiming that home equity should not be sandbagged until owners pass away. They say this applies to both those retiring short on money, as well as sophisticated and wealthy individuals. New surveys and data suggests that leveraging home equity can be incredibly beneficial for optimizing finances over the long term.

The Myths & Risks of Free & Clear Homeownership

Many homebuyers, owners, and even real estate investors are still operating in a scarcity mindset. This is often seen in the furious mission to pay homes off ‘free and clear’ as soon as possible, at all costs. This isn’t all bad, but it isn’t normally as good of a financial strategy as many think. They think it means achieving ‘security’. Yet, the truth is that even once you retire, you’ll always have taxes, insurance, and maintenance costs. Those needs and costs never go away.

Many forget to really plan ahead. They think their first home has to be their “forever home”. So they stretch themselves further than they should financially, and obtain more bad liabilities than investing. Most people will end up moving every 5 to 7 years anyways.

Another dangerous myth is that the kids will want to keep and live in the family home after parents are gone. Merton doesn’t see this happening, and points out how much we’ve changed. It’s not happening for the vast majority of families. Either kids hate their parents’ home choices, don’t want to live with the memories, desire to live somewhere else, or the property is a tear down by the time they get it.  So how do individuals slash their costs in retirement, maximize income and wealth, and leave an easier to pass on legacy?

The 3 R’s for Smart Financial Planning

1. Recognize

Recognize the real math of the path ahead. Too many are retiring without enough cash and income. They face massive and mounting medical bills, homes in disrepair, depressing lifestyles, and – at best – reliance on stock market performance to deliver. With experts from Goldman Sachs and Market Watch predicting there may be zero returns to a 50% stock market crash in 2016, that’s looking really ugly for those retiring soon. You’ll need access to passive income, and alternatives so that you don’t deplete your retirement savings in the down years right when you retire.

2. Reverse Mortgages

Reverse mortgages can cure all, that is – at least – according to today’s top financial thinkers. A reverse mortgage can cover the costs of healthcare, property maintenance, provide a backup, act as your second pension, and won’t create new payments or crush your income potential.

More advisers are realizing this. Angella Conrard of also highlights that reverse mortgages are different today than they were 10 years ago. Many of the bad terms have been eliminated, while new loan programs and lines of credit offer great flexibility that homeowners can count on. Experts now say the best move is to secure a reverse mortgage credit line as early as possible.

3. Reinvest in Turnkey Real Estate

What if you had 10 homes you could tap into for equity later in life? They could provide income now and then, while building equity. Use that cash to grow investments, and consider professionally managed or turnkey income properties