A Hidden Source of Wealth Many Retirees Overlook

On the other hand, the composition of those using the strategy changes with the housing cycle. In a bull market, up to 50% of retire-and-relocate individuals move from a housing market with significantly above-average growth — i.e., the lottery winners — as in the case of the Boston homeowner.

During housing market downturns, however, lottery winners’ representation among those retirees who are relocating drops dramatically, toward 20%. The void is filled by the bargain hunters who access equity by moving to a housing market with weaker historic growth.

In the end, for all homeowners, the outcome of retiring and relocating is subject to the timing of the move relative to the national housing market cycle and the difference in housing market growth between the origin and the destination.

An Evolving Housing Market

The research goes on to analyze the evolution of several dozen major local housing markets from 1980 to the present. For much of that time, according to Vanguard, housing markets dynamics across the country had predominantly local drivers, resulting in significant dispersion in appreciation.

“Since the 2008-2009 financial crisis, however, most local housing markets have become highly synchronized and moved in lockstep with the national housing market, enjoying a secular upward trend,” the report points out. “Dispersion has been dramatically compressed, creating a friendly environment for retiring and relocating.”

Should the broad-based housing market momentum reverse, however, this new nationalized situation implies that retirees might face far less friendly circumstances for taking advantage of this strategy in the future.

What the Next Decade Might Bring

Vanguard’s report concludes that, whatever comes next, a close examination of the way local housing markets have evolved over the last 40 years shows the period that has followed the Great Recession has been “highly unusual.”

“Against this friendly backdrop for retiring and relocating, home ownership in one local market has generally provided a relatively good hedge for destination markets,” the paper explains. “Moving forward, should local housing markets disconnect and the importance of local-market-specific growth return, it may become significantly more disruptive for retirees to retire and relocate.”

Should the historical pattern reemerge, a desired retirement destination may very well cost more rather than less, especially if it becomes popular and its appreciation outpaces that of the current pre-retirement residence.

According to Vanguard, this dynamic could lead to an increase in adaptive behaviors such as increased flexibility among those who need to prioritize accessing home equity. One option would be “locking it in” by selling and renting in the current pre-retirement location — at least for a few years.

Ultimately, the paper suggests, home equity represents one of the most prevalent and often the most significant source of wealth for American households entering retirement, but there has not been a commensurate focus on the use of this wealth in retirement.

“Our results challenge the narrative that housing wealth is off-limits to most retirees,” the authors suggest. “A natural avenue for future research is to incorporate the retire-and-relocate strategy when assessing retirement readiness across the country.”

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