Major Source Of Wealth
Our home is the emotional hub of our lives, going beyond the basic provision of comfort and shelter. They are where we build memories and a place which gives us nearness to family, friends, and community. Retirees will need to live where they can continue to be connected socially after leaving the workforce and children have left the home. Transportation options, quality health care, and long-term care services will also become increasingly important during the later years of life. As such, it is vital that our retirement income strategies account for where we’ll need to live, how long we should stay, and whether we’ll need to move later in retirement.
Many won’t view it as such, but their current home can be an income source for retirement. This asset can be a significant source of wealth, and home equity often represents more than half of their household’s net worth, larger in value than even the investment portfolio. Therefore, it’s wise to consider using your home equity to meet future retirement housing needs.
Cash In On Your Equity
A reverse mortgage can allow you to tap into your home’s equity during your golden years. These loans provide tax-free income to the borrower without imposing a rigid payment schedule. In fact, you can choose not to make any payments at all while you continue living in your home. After you move or pass away, the loan can be repaid out of the sale proceeds or from your estate. If retaining ownership of the home is not important, the loan can remain unpaid. The lending institution will then assume ownership of the home.
Opening a reverse mortgage early in retirement offers two benefits which can help improve retirement outcomes, even after paying the high costs of this type of loan.
- The income from a reverse mortgage can reduce or eliminate the need to withdraw funds from the investment portfolio during and after market declines. This creates more opportunity for the portfolio to recover after drops in value.
- The amount of cash that can be borrowed, known as the “principal limit,” will continue to grow throughout your life. It is based on a percentage of the value of the home and affected by interest rates, as well as the age of the youngest borrower or non-borrowing spouse.
Another option to convert home equity into income is through downsizing. This could mean moving to a smaller home or into a similar-sized home in a less expensive community. For example, if the equity in your home is $500,000, and you sell and move into a $400,000 home, then $100,000 can be used for other retirement needs.
With housing costs being a significant expense for the retiree, it’s important to keep in mind that smaller homes typically have lower overall expenses. This has the potential to boost available income or savings throughout retirement.
You could consider moving to an active community for adults, which may be less expensive and which provides organized activities and social support. If you need health care or assisted living options, Continuing Care Retirement Communities (CCRC) may instead be the best option. CCRC’s are well suited to cover long-term care needs in the future without the need to move outside of the community.
You could sell your current home and rent either another home or an apartment. Renting frees up home equity and provides more options and flexibility during retirement. When analyzing the decision to rent – rather than buy – your retirement home, here are some factors to consider:
- You will forfeit any additional build-up in equity and growth of the home’s value,
- You will realize additional savings without the costs of property taxes and maintenance, but
- The ongoing rent expense will add up significantly over time.
A Helpful Resource
Whether downsizing or simply relocating, you need to be aware of the key issues when purchasing a home. These include how the costs will impact your overall financial planning goals. My checklist, “What Issues Should I Consider When Buying A Home?” covers the following:
- Cash flow issues, such as the costs to maintain the home, the impact that owning a home will have should one spouse need/want to stop working, as well as how long you intend to live in the home.
- Financing issues, including your debt ratios, qualification for advantageous mortgage terms and/or special lending programs (e.g., VA loans), and the loan application process.
- Income tax and estate planning issues, including mortgage interest deductibility, basis tracking, and how to properly title the home.
- Insurance issues, including property and casualty policies, and appropriate levels of life insurance coverage.
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Choosing Whether To Stay Put Or Move
When choosing the right location and type of housing for retirement, it will be vital to imagine how our lives will change as our bodies slow down, where health issues and aspects of the aging process will make us less mobile. Joseph Coughlin, the director of the MIT Agelab, created three basic questions to help us identify quality of life issues during retirement. The questions are:
- Who will change my light bulbs?
- How will I get an ice cream cone?
- Who will I have lunch with?
These questions allow us to assess whether we can or should plan on maintaining a home, whether we’ll have access to a community where we will be able to enjoy basic conveniences – with or without driving – and what social opportunities will likely remain as our friends also become less mobile or move away. Will we be in a place where these key features of quality living are accessible?
Freedom And A New Set Of Options
Without the need to remain settled in one location for family and careers, there will be more options and freedom to move.
- For those without kids in the home, moving to an area with less emphasis on schools can lead to lower property taxes offering a boost to available income or savings.
- Moving to a state with lower taxes for retirees can do the same.
- Moving can put the retiree closer to the types of places which better suit their interests.
Moving Not A Viable Option
Staying put means not having to leave behind the family, community ties, and friendships that have developed prior to retirement. It means being able to maintain the stability and familiarity those represent. Significant memories and good feelings about our homes become an important part of our emotional identity and leaving that behind may not be a viable option.
Furthermore, there’s pride in home ownership, especially once the mortgage is paid, and the need to relocate could diminish with the inclusion of new technologies and renovations.
With the aging process slowly reducing our mobility, relocation may be inevitable. Either way, our long-term housing income strategy must include a plan for aging in place and ready access to the medical care we’ll need in the future.
Items For Consideration When Deciding To Stay Put Or Move
- Availability of interesting leisure activities
- Diverse transportation options
- Access to quality health care
- Agreeable climate and community
- Access to family and friends; ability to maintain social ties
- Ability to Age in Place in one’s home
- Housing prices: what are the relative costs of homes
- Costs of living and affordability of new location
- State income taxes
- State sales tax
- State inheritance tax
- Local property taxes and costs of municipal services
- Other state tax rules regarding retirement income sources like Social Security and inheritance tax
My resource, “What Issues Should I Consider When Buying A Home?” will be very helpful should you decide to buy a new home in retirement. I would love to speak with you about your long-term housing needs and a retirement plan that helps give you the confidence about the future that you want.