A couple think about cashing out to bolster their retirement kitty. By Jeffrey R. Kosnett, Senior Editor February 22, 2008 The housing slump is starting to unnerve people with oodles of home equity. John and Michelle Potocko are sitting on as much as $500,000 of it in their large home in Clarksville, Md. They have good jobs -- Michelle, 46, works in telecommunications marketing and John, 56, is a government contractor -- and no other debt. Yet they're contemplating downsizing to a townhouse. The couple, who met when they were both professional actors, bought their house new in 1999 for $419,000. It is now worth around $850,000 to $900,000 and they owe $300,000 on the mortgage. They would presumably pay cash for the townhouse and use the rest of the gain to bolster their savings. Their array of IRAs, 401(k) plans and assorted stocks and mutual funds is worth about $500,000. Over the years, Michelle says, she and John "made a lot, lost a bunch, got some of it back, and now we're struggling again." She fears that their savings won't last long if she loses her job or if John loses his. Many people are asking whether they should sell their home and pocket the tax-free gains of up to $500,000 before prices sink even further. Generally, advisers say you should think of your house as shelter rather than as an investment. But housing values have gone up for so long that, even with prices down, millions of families like the Potockos have half of their net worth, if not more, tied up in their home. It wouldn't be prudent to put half of your assets in a single stock. Should the same kind of thinking apply to your house? Advertisement A stock can plunge 20% in a day, and the entire market can sink 22% in a year, as happened in 2002. Housing prices are less volatile, but a homebuilder could slash prices on slow-moving new properties, undercutting existing values in the neighborhood. It takes a lot more time and effort to sell a house, though, than to unload a stock, which you can accomplish with a single keystroke. Touchy markets If you do sell your house, you'll need a plan for the proceeds. Stocks have been volatile since last summer, and investors are concerned that the economy is tanking. Rather than try to time the market, it's important to know your tolerance for risk, when you'll want to tap your savings and how any new investments will fit with the rest of your portfolio. Assume the Potockos clear $500,000 from selling their house. If they pay $400,000 for a townhouse nearby, they'll have $100,000 to reinvest immediately. They'll also save $20,000 a year (after taxes) on mortgage payments and lower property taxes, as well as upkeep. If Michelle and John work ten more years (and continue to pay in to their retirement accounts) and generate 8% annual returns overall, they'll have $1.7 million -- enough to retire comfortably. But for this plan to work, the Potockos will have to reorganize their portfolio. The mutual funds in their retirement plans are fine, but blowups among individual stocks have hurt returns. John and Michelle should dump some of the riskier stocks and rely more on such fine growth funds as Marsico 21st Century. They should also trim their total stock allocation from 90% to 75%. Both moves will help them sleep better. Advertisement It's important to remember that selling a house isn't like unloading pesky stocks. Once you've done the deed, it's hard to turn back. And if you make poor investment decisions with your profits, you may end up working until you're 70. Stumped by your investments? Write to us at firstname.lastname@example.org.