Morningstar: Home Equity Makes for ‘Wobbly’ Retirement Stool

Though often considered a retiree’s greatest asset, home equity may no longer be a reliable investment from which to draw upon during retirement, suggests a recent Morningstar article.

“For many retirees, home equity has traditionally been a steady fourth led of their retirement stool,” writes Morningstar contributor John Wasik. “In the past, growing home values could prop up one’s total wealth when the other legs (Social Security, pensions, and savings) appeared wobbly.”

But home equity, a.k.a that fourth leg of the “retirement stool,” may not be as sturdy for future retirees, suggests Wasik, especially when considering changing demographics, the housing crash of 2008 and the future of U.S. residential real estate.


It can be risky to count on home equity for spending needs in retirement, said Liz Revenko, a certified financial planner with Mosaic Financial Partners in San Francisco.

“I don’t necessarily view a home as a retirement investment,” Revenko said in the article. “It’s your personal residence—the place you live in, not a diversified, liquid investment.”

But for retirees who have been relying on their home’s value as they approach retirement, there are several considerations, including the use of a reverse mortgage.The article, however, clings to the notion that reverse mortgages are a loan of last resort.

“If you need money to live on, refinancing and doing a cash-out or obtaining a reverse mortgage is possible,” writes Wasik. “But those options require that you go into debt and pay closing fees. As such, these are really last-resort alternatives to obtain cash. They are inferior substitutes to prudent portfolio planning.”

Written by Jason Oliva

Join the Conversation (3)

see all

This is a professional community. Please use discretion when posting a comment.

  • For years, CNBC focused on the problems in the real estate market to show how superior the securities and commodities markets are to real estate. Today there is a real estate segment but it is generally aimed at the high end of the real estate market and to some degree commercial properties.

    Ask a real estate economics expert and you might hear how wobbly the equities and commodities markets are today. It all depends on information, understanding, bias, perspective, and outlook. We have yet to feel the full impact of the end of QE and expected interest rate tweaking of the Fed on the stock market.

    Those who have recently been burned trading in the stock market will be more likely to listen to the real estate experts. Yet in peak real estate markets, HECMs can help capture higher amounts of value on moderately priced homes.

    Some talk about home equity in the capture conversation but HECMs capture value, not equity. For example, how much more home equity of $500,000 can be captured if the home is appraised at $950,000. The answer is little to none based on the interest rate and age of the senior!!!

    • “For example, how much more home equity of $500,000 can be captured if the home is appraised at $950,000. The answer is little to none based on the interest rate and age of the senior!!!”
      I think you had a good point to make with this example, but I have to admit it was lost on me.

      • REVGUYJIM,

        It is that home equity alone is no indicator of anything when it comes to HECMs. To estimate anything we need five things, 1) the age of the youngest borrower, 2) the expected interest rates on 3) the HECM products in which the borrower has expressed an interest along with their 4) approximate upfront costs and 5) either a) the value of the home or b) the debt on the home.

        While many will agree with 1), 2), 3), 4) and 5) a), fewer will understand why 1), 2), 3), 4) and 5) b) could give us any idea about helping a senior.

        If we have total debts plus 1), 2), 3), and 4), we can determine the minimum amount of home value needed to pay off existing liens. For some that could help them decide on moving to the point of getting an appraisal.

        But even if we have items 1) through 4) and only home equity, we really do not have much to start with.

string(102) ""

Share your opinion