Many seniors count on their home as a source of retirement income, but that's not necessarily a good idea

Downsizing is a common feature of retirement planning. But two trends could throw a wrench into that: First, more older Americans are carrying debt, typically mortgages, into retirement. Exacerbating this are housing trends that could pose a problem for baby boomers looking to sell large, suburban homes to pay off their mortgage and shore up retirement savings.

Baby boomers are clearly more comfortable holding debt than the prior generation, which sought to pay everything off before retiring, says J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin. About 70% of 65- to 74-year-olds held some debt in 2016, up from 52% in 1998; among those 75 or older, almost half had debt, double the ’98 level, according to the Employee Benefit Research Institute.

Historically low interest rates over the past decade has made borrowing less painful, of course—and even savvy, given the returns delivered by the decadelong bull market in U.S. stocks. But challenges could be ahead. “Higher fixed payments in the early part of retirement to cover the mortgage create added strain if there is a portfolio downturn,” says Wade Pfau, director of retirement research at Mclean Asset Management.

And those banking on selling their home to pay off their mortgage or home-equity line of credit, and using the remainder to boost their retirement savings, could also run into trouble. Already, there are signs that McMansions might not sell as quickly as before and that the allure of a big home in a good school district might not be as appealing to home buyers who are having children later, if at all. The share of home purchasers with children slid from more than half in 1987 to about a third in 2018, according to research by Arthur Nelson, professor of planning and real estate development at the University of Arizona.

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