Retire-and-Relocate Strategy Can Pay Off for Some Retiree Homeowners

Home is where the retirement funding is. At least, that is the potential for retiree homeowners who can use home equity to extract greater amounts of retirement income, according to new Vanguard Group data.

By using a retire-and-relocate strategy, homeowners unlocked a median figure of $99,019 from their homes in 2019, found the research paper, and the amount rises to $347,000 in the top 10% of homeowners who relocate to a less expensive housing market.  

“About 25% of all retirees in the next 10 years could be using the strategy of retiring and relocating to a cheaper market and extracting potentially north of $100,000 to then add to their retirement funding in more traditional sources, [including] financial accounts,” explains Kevin Khang, head of active and alternatives research in the investment strategy group at Vanguard.  

The paper is part of a larger Vanguard effort to examine the levels of general retirement readiness for Americans across the country, he adds. The study investigated the extent to which people use their home equity to fund retirement, explains Khang, a co-author of the paper.

About 80% of Americans aged 60 or older are homeowners—with housing wealth accounting for almost 48% of the cohort’s median net worth—and the average homeowner in the group has $223,000 of retirement savings in financial accounts, the research finds.

Unlocking home equity “could be mission-critical to a secure retirement” for some individuals to supplement their retirement income, as “retiring and relocating could be useful for many retirees,” the introduction argued.

The research studied two types of relocators to highlight the underlying importance of strength in the original local housing market: those who move from a booming housing market, called lottery winners, and those who move to a low-growth housing market, termed bargain hunters. 

“It’s an opportunity for those who are fortunate enough to tap into it,” says Jeff Snyder, CEO of the Broadcast Retirement Network, a media platform focused on finance news and retirement. “The question is, ‘What about all the other people who aren’t as fortunate who are not in that situation?’ If you don’t own a home, this is not an arrow in your quiver.”

A Moving Disparity

The research showed a significant range of extractable home equity values, based on the original local housing market. The research noted that for those who are moving from states with a weaker housing market to a stronger market, they would likely have to inject additional funds to pay for housing.

“Retirees moving out of their primary residence on the West Coast—Washington, Oregon, California—and in the Northeast are most likely to unlock home equity when they retire and relocate,” the paper stated. “Movers from Nevada, Utah, Colorado, Arizona, and Florida are also well-positioned.”

Vanguard analyzed the average potential home equity extracted or injected by the state of origin for retire-and-relocate strategy users and scored these on a ratio, expressed as a positive or negative percent. A positive number meant potential value extraction, whereas a negative number meant retiree homeowners must inject new funds, thereby eliminating any potential to supplement existing retirement savings with value extracted from the home they are leaving.

“Those originating from other states with a weaker housing market, including many in the Midwest—such as South Dakota and Nebraska [-25%] and the South—such as Mississippi [-32%] and Alabama [-27%] may end up injecting additional funds into housing,” stated the report.

Hawaii homeowners have the highest potential amounts of home equity gains at +116%—although Washington, D.C., took the overall apex, at +174%—for the 50 states, followed by California at 77% and Colorado at 73%. The lowest numbers were in weak housing-market states such as West Virginia at -48%, Oklahoma at -36% and North and South Dakota at -33%.

“You’re very lucky if the home you bought has appreciated in an area; you can then take some of that equity, lock it in, move somewhere else: It’s beneficial, but it only benefits a subset of the population,” says Snyder, a former vice president and national public markets practice leader at Cammack Retirement Group.

New York and New Jersey scored 33%, Massachusetts 59%, Florida 25%, Maryland 30% and Connecticut 23%, Vanguard found.

“Certainly [retire-and-relocate] is an option for people—especially if they don’t have retirement income—to tap into that home equity, provided that they’re living in an area with a lower cost of living,” adds Snyder.

Despite the Vanguard research, a 2020 working paper from the Center for Retirement Research at Boston College, found it may not be widespread, because retirees would prefer not to move, although the working paper data covered a larger set of age cohorts.

The Center for Retirement Research analysis used the University of Michigan Institute for Social Research’s Health and Retirement Study to analyze three cohorts: the HRS cohort (ages 50-54 in 1992), the AHEAD cohort (ages 70-74 in 1993) and a synthetic cohort covering the whole lifespan from age 50 to death, according to the paper abstract.

The paper examined common housing trajectories in retirement to explore how often, and for whom, tapping home equity would be a viable strategy, the paper stated.

“Overall, the findings largely support the narrative from prior research that most people want to age in place and move only in response to a shock,” the research abstract stated.

The paper found:

• Homeowners either stay in the home they own in their 50s, at 53%, or purchase a new home around retirement and stay for the rest of their life, at 17%. Roughly 70% of households have very stable homeownership patterns, even over several decades.
• The 30% of households that do move consist of two distinct subgroups: Frequent movers (14%) often face labor market challenges; late movers (16%) are slightly more affluent than the households that never move, but then face a health shock that forces them out of the home they owned into a rental unit or a long-term services-and-support facility.

Plan Sponsors’ Role  

For plan sponsors and participants, the Vanguard research encourages a holistic perspective for understanding how ready people are for retirement, says Khang.

“The role of real estate wealth has just been not discussed as much as it really should be,” he says.

Plan sponsors must also heed that at least some participants intend to pursue a retire-and-relocate strategy.  

“Anytime you’re tapping into a home, it generally appreciates, but it may not appreciate at the rate that you might expect, or that rate might change over time,” he advises. “We’ve seen areas of the country that did really well during the pandemic—[like] Idaho and other places that were at the top of the market—drove up property values, but that isn’t always the case. We’re seeing that now with [price] deflation, so if you’re going to tap into that [home equity], you need to be aware about the risks.”

For plan sponsors, “It’s worth nudging people and just reminding and refreshing their awareness that this is a particular channel to be looked at, in addition to all their traditional sources of retirement funding,” Khang adds. “It doesn’t hurt to raise that awareness so that they can factor [it] into their holistic decision around where they might want to be when they retire.”

Plan sponsors can assist by educating individuals on the complex topic, so they are prepared to make any significant financial decision, adds Snyder.

“No. 1, it’s all about the education,” Snyder says. “There are things that you need to be educated about, [and] just like if you were to move money into an annuity, you have to understand the cost and liquidity, or the lack of liquidity,” and the associated risks. 

Kate Mckinnon and Joanna Rocha, investment strategy analysts at Vanguard, are additional co-authors of the paper, along with Khang. Vanguard sourced data from the American Community Survey and Federal Housing Finance Agency, the paper stated.