With housing market prices at peak levels, retirees may wonder whether it is a good idea to sell their home, become renters and use the cash to generate investment income in the stock market.
There are several reasons why it makes sense for some retirees to do this, says Matthew J. Ure, vice president of Anthony Capital in Garden Ridge, Texas.
Investing primary home proceeds in a “prudent” portfolio leaves retirees wealthier because it can return more than the home would, says James Di Virgilio, co-founder of Chacon Diaz & Di Virgilio Wealth Management in Gainesville, Florida. “Residential homes are a terrible investment when all factors are considered,” he says.
[See: 7 Under-the-Radar Financials to Buy for Income.]
But whether it is wise to take this approach depends heavily on your personal circumstances, so before you decide to become a tenant and invest your primary-home proceeds, consider the following.
Is the house worth enough? It may make sense to sell if your primary residence is valued particularly high compared to the past few decades, adjusted for inflation, says Steve Jon Kaplan, CEO of True Contrarian Investments in Kearny, New Jersey. Selling “high” will allow you to generate the most income possible, and the proceeds could sustain you for many years with the “rule” that retirees should draw down about 4 percent of their nest egg annually in retirement.
If the retirees are elderly and proceeds from the home’s sale could pay for an assisted living or retirement community that better suits their needs, this could be a good move, says Chris Cooper, a certified financial planner in San Diego.
“If [retirees] own a house and prices are considerably higher than average, as they are today in many cities in the United States, then they should be more likely to favor selling their house and renting instead,” says Kaplan. “If prices at some point become undervalued several years later and they are no longer eager to keep renting, then they can take advantage of the bargains to purchase a house later on.”
But if you live in a home where the value is not high enough to generate investment income from a sale for life, it makes sense to stay put, says Bill DeShurko, chief investment officer of Fund Trader Pro in Centerville, Ohio.
Do you have enough retirement income? If there is not enough retirement income from other sources such as pensions, Social Security or an existing portfolio of investments, then selling the house and investing the proceeds to generate additional income may make sense, says Fred Leamnson, founder and president of Leamnson Capital Advisory in Reston, Virginia.
[See: The Best ETFs Retirees Can Buy.]
However, if the sale proceeds are not invested in another residence, retirees could owe capital gains taxes, which reduces the amount of capital available to reinvest. And with the recent tax law changes, many retirees won’t itemize deductions such as mortgage interest and will use the standard deduction instead.
“So, if there is a mortgage on the house, it likely won’t provide any tax benefit,” Leamnson says.
Can you change your lifestyle? Besides the financial considerations, the decision to sell a primary residence also is a lifestyle choice. Ure gives the following example: A 62-year-old single woman living in White Plains, New York, owns a 2,800-square-foot house. Her annual property taxes are more than $17,000 a year! Add maintenance costs that can reasonably be estimated at an average of $6,000 a year and the cost to stay in her home is $23,000 a year.
If she sells her house for about $900,000, she can free up capital for retirement goals and rent an apartment. With bond funds and annuities yielding 4 to 6 percent annually, on average, the money could generate $36,000 to $54,000 a year in interest income that could be used to pay for housing costs.
If a retiree doesn’t want to move, or lives in a home that has been in the family for generations and has sentimental value, then selling may not be a desirable option, Ure says.
“Even for those who prefer to stay put, there are some potentially attractive options, such as reverse mortgages, that still allow for access to home equity for retirement but do not require you to move,” he says.
How will you invest the proceeds? If you decide to invest the proceeds of your home, do so wisely and conservatively, since you will likely begin taking withdrawals almost immediately, says Nate Condon, co-owner of Walkner Condon Financial Advisors in Madison, Wisconsin.
“A large loss of principal due to too much volatility, coupled with constant withdrawals, is a recipe for disaster,” he says.
So is trying to beat the market, since that is impossible to predict, Condon says.
[See: 8 Ways to Buffer Your Portfolio From a Market Slide.]
How much does it cost to rent? While paying for a rental with investment income may appeal because of the low-maintenance lifestyle, you will be subject to rental increases, which could double your cost of renting over time. More often than not, the cost of renting exceeds the cost of principal, interest, taxes and insurance on a retiree’s current home, says Edward G. Siddell, CEO and chief investment officer for EGSI Financial in Dublin, Ohio.
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Should Retirees Invest Home Sale Proceeds and Rent Instead? originally appeared on usnews.com
