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February 28, 2023 at 05:13 PM
What You Need to Know
- About 60% of migrating retirees in recent years have derived substantial financial benefits from relocation, according to a new Vanguard paper.
- The typical retiree who moves to a cheaper housing market can extract about $100,000 of home equity, while “lottery winners” can access nearly four times that amount.
- The authors say their results challenge the narrative that housing wealth is off-limits for most retirees.
One in four U.S. retirees could derive substantial financial benefit from relocating to a more affordable housing market during the coming decade, according to a new analysis published by Vanguard.
Vanguard’s new in-depth research suggests generations of previous retirees have tapped into housing wealth as an important source of retirement funding via the “underappreciated channel” of relocation to a cheaper housing market. However, given long-term dynamics in the U.S. housing market, this strategy may be more relevant than ever.
In fact, Vanguard finds that about 60% of migrating retirees in recent years have derived substantial financial benefits from relocation, typically extracting about $100,000 of home equity.
Winning the Housing Lottery
Vanguard’s analysis highlights two types of relocations. First are those of retirees moving from a booming housing market to a more affordable market, a group Vanguard likens to “lottery winners.” Second are those who move to a low-growth housing market, or “bargain hunters.”
As the analysis shows, relocation lottery winners show up more prominently near the peaks of housing cycles, whereas bargain hunters appear mostly during the troughs. In both cases, retirees can achieve a substantial wealth windfall.
In fact, the research suggests that unlocking home equity by relocating to a less expensive housing market can provide a pivotal source of retirement funding, potentially enough to make or break a retiring couple’s nest egg.
Retirees who successfully take advantage of this strategy also often experience a substantial drop in their cost of living, Vanguard finds, allowing any windfall to go even further in retirement.
Running the Numbers
To demonstrate the potential power of the strategy, the Vanguard analysis points to a theoretical retired homeowner who purchased their primary residence for $170,000 in Boston, assuming the purchase was made in the early 1990s while the person was in their 30s.
This home would have enjoyed substantial appreciation that is significantly above the national average. According to the report, a current valuation in the realm of $500,000 would be reasonable.
If this person chose to start their retirement in Florida in their 60s in the early 2020s, they could unlock as much as $200,000 in long-term capital gains that could be directly added to the retirement nest egg, Vanguard says.
In 2019, the median homeowner age 60 or older using this technique could have accessed approximately $99,000 in home equity. The figure rises to an impressive $347,000 at the top 10th percentile.
“Since the average homeowner in that age group holds $223,000 of retirement savings in financial accounts, the additional funding could be mission-critical to a secure retirement,” the report suggests.
Housing Market Dynamics Play a Key Role
According to Vanguard, the tendency to move to a less expensive housing market varies along two important cycles. On the one hand, the tendency shows a “hump-shaped” pattern over a given investor’s lifecycle, meaning the tendency to move to a cheaper market rises in one’s 30s to 50s and peaks in the 60s. It then declines rapidly from the 70s into the 80s.
