Homeowners in or near retirement often hear experts preach the benefits of downsizing, or selling the current home to buy a cheaper one and pocket the difference. But an alternative often gets less attention — selling the old homestead and renting the replacement. Proceeds from the sale can be a great way to add to your investment portfolio.
It may be possible to enjoy a larger return by shifting equity from a home to stocks or other assets, rather than simply using the proceeds from the old home to by a new one. Interest, dividends or capital gains from the alternative investment can be used to help pay rent and other living costs.
Erika Jensen, president of Respire Wealth Management in Houston, gives a hypothetical example of a retired couple investing $360,000 from a home sale, moving to a rental for $2,000 a month and experiencing 3 percent annual rent increases for the next 20 years. Rent would total $656,000 over that period, while the investment could grow to $1.15 million with average returns of 6 percent a year.
[See: 7 of the Best Stocks to Buy for 2017.]
If the investment were needed to produce income for rent, the investor might choose a more conservative portfolio with a smaller annual return, she says.
“Drawing income off of any investment with too much price movement can rapidly deplete the finite resource of retirement funds,” Jensen says. “However, if the retiree has sufficient income security, then the equity that used to be in the home is like gravy. It can be invested more aggressively to increase quality of life in later years or to pass on a considerable legacy to heirs. It could also be earmarked to cover potential long-term care costs or used to purchase long-term care insurance.”
Assets like stocks, bonds and mutual funds are also more liquid than home equity, making it easier to move money around as opportunities change.
Alternatively, the home proceeds could be invested in an immediate annuity paying $1,953 per month for life, according to the quote site Immediateannuities.com.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Experts say the first step in evaluating the rent-vs-buy option in retirement is to closely study the cost of owning any prospective new home, as well as savings from unloading the old one. Mortgage, taxes and insurance are easy to tally, but the assessment should also include a budget for major repairs like a new roof or furnace and professional lawn care that may be needed sooner or later.
A new home might grow in value over the years, but maybe not as fast as many think. That depends on location, and prices can and do drop from time to time.
One benefit of renting is it’s not a long-term commitment. It’s easy to change locations for financial reasons or personal preferences, and it’s not necessary to settle on a lifestyle for the long term.
“Don’t rush to downsize if you’re not yet certain what the future holds,” says Matt Gulbransen, owner of Callahan Financial Planning in Minneapolis. “You wouldn’t want to relocate to Florida only to realize you’re still needed back home in Minnesota. Think about your retirement plans, as well as your family’s situation. Is there an adult child who may want to move back home or an aging parent you may need to take care of?”
But downsizing to an unfamiliar area also presents risks.
“If retired or soon-to-be retired clients are thinking about relocating, I’ll recommend that they rent for a year in their target area to really get a feel for the community and weather,” says Ryan McPherson, founder of Intelligent Worth, a fee-only financial planning firm in Atlanta. “This helps avoid the financial problems and stressors that come with having to sell a newly-purchased home a few years after buying.”
[See: 10 Financial Perks of Getting Older.]
For many, renting seems like a step backward, to a time before they had the resources to own, and may view renting in retirement as a sign of financial misfortune. But carefully investing the proceeds from the sale of their homestead can give older homeowners additional financial options.
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Renting Is Worth a Look After Downsizing originally appeared on usnews.com
