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“What’s your number?”

In the past few years the question has become a popular way of thinking about funding retirement, and it’s even featured in ING bank’s (Stock Quote: ING) ad campaign. But it’s not completely clear what the number includes. Is it retirement savings? Your total net worth? Or something else?

One of the key questions is, How does your home fit in?

Odds are, most people do include the value of the home when they tally retirement assets. But that can be a mistake. Unless you have access to free housing – by moving in with your children, for instance – much of the home’s value will be needed to keep a roof over your head. It just won’t be there for medical bills, food, vacations and other expenses, although some value will be available for spending. The trick is just to figure how much.

For the simplest approach, figure the equity in your home and subtract the cost of a cheaper home you could move into when you retire. If your home is worth $400,000 and the mortgage is paid off, you could pocket $150,000 by moving to a place costing only $250,000, though fees like the realtor’s commission and title insurance would chew into that.

Counting only $150,000 of the home’s value toward the retirement number can leave you a lot further from your goal.

For another approach, consider how much equity you could extract from the home through a reverse mortgage. This would allow you to stay in the home rather than downsize. But again, you would not have access to all the equity in the home.

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You need no income to qualify for a reverse mortgage because there are no loan payments. Instead, the principal and accumulated interest and fees are paid from the proceeds after the house is sold by you or your heirs.

Because the lender doesn’t know how long you will stay in the home and doesn’t have the power to force you out, you can borrow only a portion of the property’s value. The older you are, the more you can get.

With a fixed-rate reverse mortgage, a 62-year old retiree might be able to get about $235,000 on a $400,000 home, assuming the home was debt free. An 82-year old should be able to get about $279,000. Use the AARP reverse mortgage calculator to get a customized estimate.

Finally, you could combine these two approaches, downsizing first and then taking a reverse mortgage on the new place some years later, when you could qualify for a larger loan.

But whichever approach you take, it’s clear that if you’re going to have to pay for your own housing for the rest of your life you probably shouldn’t count on converting more than one-third to two-thirds of your home equity into cash for living expenses.

And, of course, equity is not the same as the home’s value unless you are debt free. If your $400,000 home still had a $100,000 mortgage on in when you downsized to a $250,000 condo, you’d put only $50,000 in your pocket. And fees for selling your home and buying the condo would chew into that.

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