Considerations for making one of the most important financial decisions of your post-work life
When it comes to retirement planning, a key decision everyone has to make is how and where they plan to live. Whether you are paying a mortgage or monthly rent, selling a home or buying a new one, the long-term financial implications can make a huge difference in achieving your retirement goals. We encourage clients to be proactive about weighing the pros and cons about renting and buying. It’s really about sitting down with your financial planner and looking at those scenarios side by side to see what impact they may have on your ultimate success for retirement. The more advanced planning you can do, the better informed you’ll be and that will lead to a better decision
As you begin the process, here are a few things to consider.
Think About Your Goals
When making this decision, first and foremost, you’ve got to think about what you want to do in retirement. If you have children or grandchildren in the area, maybe you want to stay in your house, or another home nearby. Perhaps you don’t have relatives close by, and downsizing makes more sense. Or maybe you plan to travel, so paying a mortgage on a home you’ll rarely live in makes little sense. Whatever your plans, it’s important that your living situation aligns with what you expect to get out of life in retirement. Those are really big considerations and that’s where you really want to run the numbers with respect to a retirement budget.
Cash Flow Considerations
If you have a mortgage, how many years are left on it? What is the mortgage rate? Does it make sense to refinance? If you have additional or adequate savings, it might make sense to pay off that mortgage rather than carry it into retirement. Sometimes having the peace of mind knowing that the mortgage is paid off in retirement will trump the benefit of carrying the mortgage into retirement.
Homeowners will also want to consider carrying costs. If you are renting, you have monthly cash flow that you are paying to a landlord and that rent will increase over time. Though house or condo owners generally have a fixed cost of living, they also have the carrying costs of real estate taxes, insurance, utilities, or maybe association fees. Those regular costs need to be factored into the decision.
Aging at Home
If you are a homeowner, you know that keeping up a property is not easy. Is aging in your home realistic? Think about the layout—stairs, for example—and whether you and your spouse will be able to get around safely and live comfortably. Also think about maintenance. Not only home repairs, but routine work, such as mowing the lawn and shoveling snow. Are these things you are able to do or can you afford to utilize services to have them done? In most cases, the retirees I’ve worked with tend to want to stay in their house. The times when I see deviations are when they don’t want to deal with the maintenance, or they plan to travel and want to downsize.
Using Home Equity
Renting can provide more freedom for those who plan to be away frequently in retirement. Long-time homeowners can use their equity to make the transition by choosing to sell their home. Say you sell your house and realize $400,000 in gains, then invest those gains wisely. A 4 percent distribution off of that money could increase your cash flow by roughly $16,000 a year. That additional cash flow could be used toward rent or other living expenses in retirement. Of course, if you want to sell your home, you will need to keep an eye on the market. The main risk would be if we were to enter into a recession and you had to sell your house in that environment, you may be forced into taking a low-ball offer to get out from under the mortgage.
Homeowners often ask whether they have to pay taxes on the appreciation or growth of their home. For a married couple filing jointly, their first $500,000 in gain is tax free, as long as they have lived in the house for two of the last five years. Taxes could certainly have an impact on their decision with respect to selling a house and plans for using the equity from the sale for retirement goals.
It’s not uncommon for retirees to move out of state, often to warmer parts of the country. If that’s your vision, you will need to do your homework on your new destination. If you want to sell your house in Wisconsin and move to Arizona, what will your replacement costs be? Along with researching home and rental costs, you will need to evaluate the cost of living, taxes, and more. If you establish residency in a state with no income tax, such as Florida, you can put those savings toward your rent or new home costs.
Life does not always go the way we intend and sometimes retirement plans—especially in terms of where we want to live— have to change. Remember that Trust Point financial professionals are available to help. These decisions are sometimes thrust upon people in retirement, maybe because of a family situation or a health issue. Having a plan and working with your financial planner can be instrumental in those situations in helping you make a sound decision.