The largest source of household wealth for most Americans older than 45 is literally underfoot, in the form of their own homes.
And with more than 3 million members of the baby boom generation turning 66 this year alone, many are wondering whether – and how – to use their housing wealth to pay for retirement.
Among them are Larry and Kathryn Weddell of Bellevue, both in their 60s.
The Weddells bought their 63-year-old house in southeast Bellevue for $59,500 in 1983. At the time, the three-bedroom home was a fixer-upper with blackberries and an abandoned boat in the back yard.
After more than 30 years of remodeling projects and appreciation, the house has an estimated market value of about $791,000, according to Zillow. (That’s about 5 percent below the median price for Eastside homes sold in May, according to the Northwest Multiple Listing Service.) King County last year valued the Weddells’ property at $546,000 for tax purposes.
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The Weddells love their house, with its wraparound porch and large windows. But the property also accounts for an enormous portion of their wealth.
Based on its estimated market value, the house represents 94 percent of the couple’s total assets. That’s well above the national average: Housing wealth in 2016 accounted for about 58 percent of the total wealth, net of debts, for typical American households headed by homeowners older than 65, according to the Center for Retirement Research at Boston College. And even for homeowners from age 45 up, homes make up more than half of the typical household’s wealth, the center’s data show.
The Weddells’ second-largest asset is a $50,000 savings account at a brick-and-mortar bank. The bank’s annual percentage yield on savings accounts ranges between 0.03 percent and 0.06 percent — more than two percentage points below the current rate of inflation.
Larry, 69, is a full-time tech-support specialist at the Seattle office of health-services company Optum. He earns about $50,100 a year before taxes and withholding. He also participates in his employer’s 401(k) retirement savings plan, with a current account balance of about $3,000.
Kathryn, 65, is retired and collecting about $750 a month in Social Security before taxes. Larry also collects Social Security, which brings in an additional $2,000 a month before taxes.
The couple’s largest expense is their mortgage. They owe about $215,000 on the home after refinancing three times over the years to convert equity to cash – money that they spent on remodeling, repairs and other bills. They also owe $20,000 on a low-interest, secondary loan on the home.
As with so many other American families these days, the Weddells’ debt includes student loans. Larry owes $7,000 for retraining he sought after a layoff. The couple are also paying down a $39,000 education debt on so-called PLUS loans – parent loan for undergraduate students – for two of their grown children.
With Larry approaching full retirement, the couple began thinking about how they could make the most of their largest asset – their house.
A few months ago they entertained the idea of remodeling the home’s daylight basement, making it a living unit for themselves. They would then rent out the first floor for income.
But the remodeling estimates came in much higher than expected, and Larry was unsure whether the project penciled out.
About that time Larry read an installment of The Seattle Times Money Makeover project. He recalled thinking, “What if we were able to get a service like this and get some good advice?” So he applied.
The Financial Planning Association of Puget Sound connected the Weddells with Richard Marshall, a financial consultant at the Bellevue office of advisory firm Vestory.
After examining the Weddells’ household finances, Marshall saw a couple on the cusp of retirement with a lot of home equity, not much savings and a cash flow problem. He estimated that they were running about $700 a month in the red. They were tapping their savings account to make up the difference.
Marshall’s first order of business was to urge the Weddells to cut their monthly spending by $1,000, to about $4,000 a month.
“Reducing their budget right now is imperative so that they aren’t in that negative cash flow,” he said.
Marshall next worked through various scenarios for using the Weddells’ home to propel them into a secure retirement, one in which they were at little risk of running out of cash in their lifetimes.
Remodeling the basement appeared to be too costly. Raising money to pay for the renovations by refinancing or taking out a home equity line of credit also had shortcomings.
Marshall looked into the possibility of a reverse mortgage on the home. But the Weddells would still have to pay off their current mortgage, and if they moved the reverse mortgage lender would be able sell the house to recover the loan. Plus, the scenario didn’t generate enough cash flow for the couple.
Finally, Marshall advised the Weddells to sell the house and downsize by buying a condo for about $250,000.
They could use the proceeds of the house sale to pay off the mortgage and the secondary loan. Another $100,000 would go for a down payment on the condo.
Buying the condo while Larry is still working would strengthen the couple’s application for a $150,000 mortgage on the unit, with a monthly payment of about $900. (Their current monthly mortgage payment is $1,550, including taxes and insurance.)
Ideally, the Weddells would be left with about $400,000, which they could invest for retirement income. If they followed the old rule of thumb of withdrawing 4 percent a year, the couple’s new nest egg could provide $16,000 annually, supplementing their Social Security benefits.
Marshall also recommended that Larry continue working full time for two or three years. Doing so would reduce the likelihood that the couple would run out of savings late in life.
The Weddells have already started reducing their spending, starting with their grocery bill. They also realized they were spending about $400 a month on digital programming, such as Netflix and Redbox.
“We don’t live this luxurious lifestyle,” Kathryn said. “We just live a normal life.”
“But we haven’t been careful about it,” Larry said.
Larry was hoping he could retire sooner than age 73, and he’s still pondering Marshall’s recommendation to keep working. “We’ll have to figure that out,” Larry said.
After spending the last 35 years of their lives in the same house, the Weddells have mixed emotions about selling and moving.
But financial reality and sentiment are uneasy partners, and the Weddells know they must make a decision about whether to sell, or to stay. A few months from now, in the fall, they just might make that call.