Benefits from using home equity in retirement

Abstract

This thesis evaluates the benefits and consequences of using home equity in a retirement plan in Norway. Three research questions are answered: “How does home equity affect consumption decisions?” “What level of risk is a pensioner exposed to trying to execute a retirement plan using home equity?” and “What value can one expect to extract from one’s home?” To answer the questions the thesis uses a modified version of a lifecycle model and tests it by simulation. The simulation method uses one thousand scenarios based on a new Keynesian framework of the Norwegian inflation targeting regime to simulate on. The simulation tests two types of cases. One where a pensioner has a high level of home equity and a low level of pension pay out and the other where the pensioner has a low level of home equity and a high level of pension pay out. Analysing the results from the simulation the thesis concludes that there are benefits of using home equity in a retirement plan if it is used correctly and in a moderate amount.