Baby Boomers face new challenges when it comes to refinancing to tap home equity for fixed income. The real estate value they banked on to fund retirement may have been erased by the recent housing downturn, leaving them without the equity windfall typically enjoyed by seniors.

Older Americans traditionally fall back on the comfort of real estate assets to help them maintain a steady income stream during retirement. By the time they hit their late 60s, many homeowners have accumulated substantial equity, and can easily refinance or use a reverse mortgage to start tapping into that stored value. But despite the fact that many baby boomers starting planning for their retirement years ago, the current economy has created a new set of circumstances that threaten to obliterate those carefully crafted passive income strategies. As one reporter recently phrased it, "the housing crisis has crushed the nest eggs of many retirees."

Baby boomers suffering

The highly respected and reliable Case-Shiller index, which tracks real estate prices, has recently indicated that the slump in home values has effectively wiped out four years of homeowner gains. But most economists expect further erosion of prices through the rest of this year and into 2009. Meanwhile, baby boomers are watching years of savings-in the form of home equity they hoped to access through refinancing-go up in smoke. Today, homeowners have less equity and savings, and greater expenses. Many baby boomers have also watched their company pension plans dwindle or evaporate. The troubles they face are compounded by the fact that investments in the stock market, which is the other major nest egg for most Americans, have experienced a similar meltdown, with many high-flying stocks having fallen more than 50 percent during the past year.

The AARP Public Policy Institute explains that, due to insufficient assets, many baby boomers will not retire at all, because they simply can't afford to stop working. This is especially true of those who are single, and a growing number of retirement-age Americans are becoming single due to escalating divorce rates that are affecting older couples. Most studies also show that baby boomers can expect to live longer thanks to advances in healthcare. While this is good news, it means that limited retirement assets will have to be stretched thinner over a longer period of time.

Weighing pros and cons

Those who own real estate should preserve equity by avoiding the temptation of tapping into it for any purpose that won't enhance the value of the home. Baby boomers who have equity should also weigh the pros and cons of downsizing to a more affordable home by selling. Moving to a smaller place can also help to lower the cost of upkeep and maintenance, which can add to potential savings. In the long run, it may make more financial sense to sell and move, versus trying to stay put and fund a retirement through refinancing.

Published on July 25, 2008