R101 #12 - Where Will You Live?
Making decisions about where you’ll live in retirement is a big deal. Some retirees dream of moving to a warmer climate. Some retirees want to move closer to grown children and their families. Others want to stay put in the home they’ve lived in for many years. It’s clear that this decision is an emotional one.
The reality is that it also HAS to be a financial one. For many, the equity in their home is a significant part of their net worth. During retirement, you need to figure out if you will need that equity to fund your retirement or not. The expenses of keeping up a home, even if you don’t have a mortgage, include property taxes, utility bills, maintenance and upkeep. These can represent a significant portion of your household budget.
Location Options
Let’s first talk about the fun part, though.
Retiring can free you to consider moving to places you weren’t able to while working. How awesome is that? You may have the freedom to try out different parts of the country or world. You can travel to destinations that have always been on your bucket list. Maybe you’ll find somewhere that’s the perfect fit for your later years.
So what makes a good fit? Although many retirees prioritize weather and taxes, there are other considerations to think of. As you age, you will likely need to think about your changing healthcare needs, access to transportation if you are unable to drive, and making/maintaining social connections that allow you to thrive emotionally. You may also want to evaluate access to cultural or outdoors events. What you no longer need to worry about are highly rated schools or the daily commute!
Now the not so fun part.
You also have to think about affordability. Many retirees fixate on income taxes, but that’s not the only feature of a location that affects affordability. Other taxes to consider are sales taxes, property taxes, and potential inheritance taxes. Will you need to pay extra for utilities, insurance, transportation, food, prescriptions, and healthcare? Try and gather some data on what these other costs will look like.
Alternate Housing Options
“Downsizing” and purchasing a new home - I put downsizing in quotes here because you’d be shocked how many retirees buy a bigger home during retirement (presumably to house family and friends who want to visit, I don’t love this TBH). Downsizing can work out well if you can purchase the new home for cash and still have some equity left over to supplement your retirement portfolio of assets. One downside is that you will likely need to move again at the point you need additional care that cannot be provided in your home. The older you get, the harder it will be to move.
Renting - this can be a great option for retirees. It provides flexibility to move easily if you don’t like where you’re at. If you sell your primary home and rent, you can free up more home equity to add to your retirement funding. The expense for renting can also end up being less than other costs related to owning a home. The downside is that you may face rising rents year over year, and it’s possible you may even be forced to move if the landlord sells the property you are renting.
Age-Restricted Communities - another option that becomes available as you age are 55+ or 62+ communities. These types of communities often have various housing options and provide social and community activities tailored to many interests. Although they don’t generally provide healthcare or assisted-living options, they can be great for younger, active retirees.
CCRCs - One other option we haven’t talked about yet are Continuing-Care Retirement Communities (CCRCs). These can be a good choice for retirees who are looking to move one time and want to enjoy social and community options in a place that will also allow them to access needed health-related services when the time comes. The financial considerations of this type of community usually involve some sort of “buy-in” where you pay a lump-sum when you move in, and then agree to a monthly ongoing payment for the rest of your life. Depending on the community, the monthly payment could include meals, activities, and other services. The CCRC will evaluate your financials prior to moving in. They will decide based on your situation if they will allow you to live there. The reason for this is that part of the agreement is that you will be allowed to live there until you die - accessing increasing levels of care needed as you age. If you run out of money, you won’t be forced to leave. This also means that it’s important to evaluate the financial health of the organization running the community. Just as they are evaluating you, you need to evaluate them and the contract you’re signing.
Staying in Your Home
For a large percentage of retirees, they choose to “age in place”. They want to stay in their current home as long as possible. There are a lot of technologies and services in the market to help retirees who make this choice. You can expect that you may need to take advantage of some of these as you become physically or cognitively impaired. It is likely less expensive to renovate your current home and hire assistance, than move into some of the other long-term care options. Some of the home updates that can help are bathroom modifications, single-level living, wheelchair accessibility, good and accessible lighting, and modified kitchens and floors. Anyone remember the “I’ve fallen and I can’t get up” commercials? This is now you.
The downside to staying in your home is that the equity trapped in your home cannot buy you groceries or pay for any of these things that you need. I feel like there’s such a push in the popular media to pay off your mortgage before you retire. It’s not always the best choice. The numerical decision involves comparing the interest rate on the mortgage to the potential rate of return you could earn by investing your money instead. Of course, investing involves risk, while paying down your mortgage is definitely going to reduce your interest paid. There are also tax considerations where you may lose the deduction of mortgage interest by paying it off (but this likely doesn’t affect many retirees in reality). You could also be causing yourself to pay more taxes by keeping a mortgage because you have to take investment withdrawals to pay the payment. It gets complicated quickly. We’ll cover taxes way more in the next post.
Quick aside - don’t stay in your home just because you don’t want to pay taxes on gains if you sell it. The housing decision in retirement is so much bigger than one tax decision. Also don’t stay in your home just because you want your kids to inherit it, and it receives an increased basis when you die. It’s possible they may not even want it, and again, don’t let one legacy consideration drive your whole plan.
For those who need to access the equity in their home for retirement funding, there are basically two choices. You can get a home equity line of credit (HELOC), or you can get a reverse mortgage (HECM - home equity conversion mortgage). The pros to the home equity option are that the start-up costs are lower. Most retirees understand the HELOC option. The downsides are that you need to make payments, you may not qualify for the HELOC because of your reduced income, and HELOCS can be canceled, reduced or frozen by the bank.
I think reverse mortgages have gotten a bad rap (probably deserved) in the past because of their high fees and the predatory nature of companies who used to offer them. They are also not the best choice as a last-resort for those who have already depleted their assets. However, the modern HECM programs allow for flexible payback structures, and a growing line of credit that cannot be canceled. They can also be used to purchase a new home in retirement. Other benefits can be the ability for the HECM to provide a contingency fund for spending shocks, supplement portfolio withdrawals to manage tax brackets, and provide an alternate spending source of funds to mitigate sequence of returns risk with investments. The complexities of this option are such that it usually makes sense to involve an expert (and not just the loan officer pitching the product).
As you can see, the housing decision in retirement is a complex one. I’ve pointed out a few areas here where taxes are a consideration. My next post will be all about taxes in retirement. I know, you’re excited.
