Making savvy financial moves can be the difference between a comfortable retirement and a retirement full of worry about how the bills will be paid. This includes decisions that are made about real estate.
Since a home represents the biggest expense and largest asset for most people, real estate decisions can end up having an outsized impact on retirement budgets. Here are 5 of the most common real estate mistakes made by some retirees.
1. Downsizing too soon. With no more kids in the house, retirees often decide to move into a smaller home to save money and lessen upkeep requirements. This might be a smart strategy, but the timing is critical.
For example, some retirees move into a smaller house as soon as the last child leaves home permanently. But this can sometimes result in emotional overload as they’re adjusting to the “empty nest” and new surroundings all at the same time. Also, it’s not uncommon for adult children to “boomerang” back home again for a period of time after college, which can leave everyone feeling cramped if the new home is too small to accommodate them comfortably.
Instead, it might be better to wait a little while before downsizing into a smaller home. This will give you and your spouse more time to adjust emotionally to the changes taking place in your life and also make it easier on everyone if one or more children has to move back in temporarily.
2. Assuming that paying cash for a smaller home is the smart move. After selling their home, retirees sometimes pocket enough money to buy their next smaller home in cash, without assuming a mortgage. Again, this will make sense in some, but not all, situations.
Of course, not having a mortgage payment in retirement will free up a large chunk of money in your budget that can be devoted to other living expenses and possibly help your retirement nest egg last longer. But you should factor the rate of return you could possibly earn by investing these funds into the equation before making a decision. Also determine whether or not you can still claim the mortgage interest deduction — if you can, you’ll retain one of the biggest benefits of carrying a home mortgage.
In short, the home mortgage decision should be made in the context of your overall financial plan, not just based on a single financial or tax factor.
3. Underestimating other homeownership expenses. Retirees who do buy a new home in cash sometimes make the mistake of assuming they’ll have no more homeownership expenses. This can be a dangerous assumption and leave retirees with shortfalls in their budgets.
The biggest ongoing homeownership expense for many retirees is property taxes, which can be nearly as high as a mortgage’s principal and interest payment in some areas of the country. Homeowner’s or condo association dues and maintenance and repair costs are other potentially large homeownership expenses.
Association dues are usually paid monthly or quarterly so you can work these into your regular budget. Maintenance and repair costs are more variable so you might want to consider contributing a fixed amount of money each month to a sinking fund to cover these costs when they arise.
4. Having unrealistic expectations about a new area. Lots of retirees dream of moving to their favorite vacation spot after they retire. But there can be a big difference between spending a few weeks a year somewhere and living there on a full-time basis. The day-to-day reality of some locations is very different from the short-term vacation experience since many vacation communities cater to tourists
Before moving to a favorite vacation spot full time, do some research into things like healthcare delivery, grocery shopping, transportation options, cost of living and taxes. Also, try to determine whether there are lots of other people there in your same stage of life who you can socialize with and what kinds of activities there are to keep you busy. You might consider a long-term rental, like two or three months, before making a permanent move to get a better feel for living there.
5. Not planning ahead for future needs. If you’re retiring in your 50s or 60s you might still be in good health and great shape. But as you age, your mobility is likely to decrease and your health will eventually decline.
These factors should be taken into consideration when buying the home you’ll live in during retirement. For example, you might choose a one-story home so you won’t have to go up and down stairs, or at least a home with the master bedroom on the main level. Also consider factors like how flat the entrance is, how wide the doors are and how much yard work and maintenance are required.
Please give us a call if you have more questions real estate moves you should and shouldn’t make in retirement.