Should Retirees Tap Home Equity to Pay Medical Bills?

As retirees age, health care costs become a significant concern. According to Fidelity, the average 65-year-old retiring this year will spend $172,500 on health care and medical bills, a figure that has doubled over the past two decades. This amount does not even include long-term care services, which as many as 40% of adults may need in the future, as per the U.S. Department of Health and Human Services.

While Medicare covers the majority of Americans aged 65 and older, it does not cover everything, leaving many seniors with significant health-related funding gaps. Even those covered by Medicare have to pay premiums, deductibles, and other expenses, adding to the financial burden.

On a more positive note, baby boomers, aged between 61 and 79, have accumulated substantial housing wealth over the years. With about half of the nation’s home equity in their possession, retirees have an additional asset to consider when facing rising medical costs. The median amount of equity for homeowners over 65 has increased by nearly 50% between 2019 and 2022, now exceeding $250,000, according to the Survey of Consumer Finances.

Using home equity to cover health care costs in retirement can be a viable option for many retirees. Research suggests that tapping into home equity can not only benefit one’s finances but also improve health outcomes. Older individuals who borrow against their home equity are less likely to skip medications due to financial constraints, leading to better management of chronic illnesses.

However, there are potential downsides to using home equity for medical expenses. Accessing home equity can be challenging for some older homeowners, especially if their incomes are too low to qualify for borrowing against their homes. Additionally, fluctuations in home values can impact the amount of equity available for borrowing.

There are two primary ways to tap into home equity in retirement: selling the home or borrowing against it. Selling the home provides immediate liquidity, while borrowing through a home equity loan or a HELOC offers flexibility in accessing funds. Reverse mortgages are another option for those who prefer not to sell their homes, allowing them to receive loan proceeds as a lump sum, regular payments, or a line of credit.

Ultimately, the decision on how to use home equity for medical expenses depends on individual circumstances. It is essential to educate oneself on the options available and to plan for future health care needs and costs. By understanding the resources and risks involved, retirees can make informed decisions to manage their health care expenses effectively in retirement.