The masses at large fail to disassociate their home from their retirement. Your home is not your retirement. Your retirement is not your home. Rewind, reread and rethink.

Separate the two as you prepare for retirement. This will ensure that you have a happy, wealthy and healthy retirement. Yes, it is likely that your home will appreciate over the next 10 to 20 years. Most research points to 3% to 5% annual appreciation. Oh boy, how exciting! Did you know that by letting money sit inside your home (making payments every month, reducing the loan amount at the bank) has no effect on your home’s appreciation in the long run?

Let’s take a step back before we get too crazy here.

Let’s say you bought a home this year for $100,000 and you plan to live in this home for 30 years. Assuming nominal appreciation based on 3% annually, the home will increase in value. By the time you are a third of the way (10 plus years) into this home ownership, you should begin to look at your equity nest egg and start thinking. At this point, 10 years in, hopefully, it will be worth at a minimum $134,000. That’s great, free money for merely paying your mortgage on time and keeping up with your home.

Don’t get too excited, it is now 10 years in the future. Groceries now cost on average of 34% more than they did 10 years ago. Your electric car costs 34% more than your gasoline clunker of 10 years ago. Your prescription, your doctor visit, your vacation, they all cost 34% more too. So hopefully you realize that $34,000 extra in equity is not going to be your saving grace.

The expression have your cake and eat it too is often used in reference to wanting more than one deserves. We should all strive for this, as it is the only way to get financially ahead. Now let’s take a different look at what we could have done at year 10 when we began to become a retirement nut and start thinking about the future.

At this point, we have made timely monthly payments and paid over $17,000 in equity on our lovely home. We should be excited! We have created, on paper, over $50,000 in equity in our cute little bungalow. The monthly payments combined with the appreciation equal over $50,000 – now what to do?

We have a few options:

  1. Pull out a home equity loan of $20,000 and buy some jet skis (have you ever seen anyone sad on a jet ski?)
  1. Refinance the house and pay off that $20,000 of student loans that is haunting us.
  2. Refinance the house and invest $20,000 in retirement.

If you chose answer #1, I suggest you quit reading here because I can no longer help you. If you read #1 and said, hmm that sound like fun! I suggest you rent jet skis for the day. The boat ramp is way too crowded anyways.

For those of you who chose answer #2, your heart is in the right place. But simply check the interest rate of your student loans and you will quickly realize that it is nearly free money that can be used to reduce your annual tax bill. Which brings me to answer #3, be smart with the money.

The key point everyone misses when they talk about their home and the equity they have amassed is they forget to talk about how useless that equity is for them. Is the equity in your home making you more money? Is it helping grow your retirement nest egg? You will likely say yes, it is helping my home appreciate. Wrong! Your home appreciates with or without your equity. Yes, paying your home off or paying down your home will help you later in life as you readjust and downsize for retirement. But what if you had put your equity to work for 30 years?

Now let’s take a look at answer #3 again. Let’s take that $20,000 out of the home and refinance. What happens in 20 years? By the time that $20,000 compounds annually at the interest rate of 8% (normal diversified market performance), it will be worth nearly $100,000. Now that is a real cash accessible nest egg! That combined with your other investments, can help you enjoy your retirement so much more.

You were still able to successfully capture the 3% annualized appreciation of your home, continue to pay on your principal, resulting in nearly $50,000 in principal plus the appreciation of another $108,000. Not only have you put your money to work for you, but you also captured your home appreciation.

This could have been done 2 or 3 times during the life of your home loan. Not only are you capturing more upside at 8%+, but you are also diversifying your retirement portfolio. Let’s say your home quits appreciating after year 20… well, you still used some of that equity to compound your way into a better place, instead of letting that equity just sit there and rot!

Photo by David Sawyer