Retirement Planning
Step 8: Your House
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Retirement Planning
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Your home is more than four walls and a roof. (Yes! We forgot the floor!)
For owners, it's much more than that. Your house is a money tree. Shake it,
and the cash will rain down. For Fools, the trick is in deciding whether,
when, and how to tap into that honey pot. Do we do it early in retirement,
later, or never? As you'll recognize by now, that, too, is a personal decision.
The home, especially when it's paid for, represents security. It's also one
of the biggest investments we make. As such, it represents an asset from
which we may obtain needed capital if and when that becomes necessary.
In retirement, we still have to reside somewhere. Wherever that somewhere
is, we will either rent or own. At retirement, most folks own their homes.
Many of them have either totally paid off or are close to paying off their
mortgages. Some will sell out and trade down to a smaller home. Some will
sell out, keep the sale's proceeds and rent. Some will stay right where they
are and enjoy the benefits of not having to pay a mortgage or rent. And a
few will sell to buy a larger, more costly home. Each of these decisions
may be Foolish. Conversely, unless we know how our decision affects our own
retirement life, each may also just be foolish (small "f"). That means we
need to look at the issues and plan accordingly.
Long-time homeowners know that their homes have increased in value since
their original purchase. Often, that equity represents a princely sum that,
if accessed, could yield an even greater return invested elsewhere. One way
to get at that cash is to sell. With the Taxpayer Relief Act of 1997, Congress
has made that an even more attractive option than it once was. Now, we can
sell our homes and receive gains of up to $250,000 ($500,000 for a couple)
totally tax-free. That may be a very Foolish way to free up capital that
can be better employed in retirement. One scenario would be to sell and purchase
a new, smaller home by making a minimum down payment on a 30-year mortgage.
(Yes, Virginia, lenders love to carry retiree mortgages because they have
a very low default rate.) Then we could Foolishly invest the cash left from
the sale. As long as that investment throws off what we need for the mortgage,
we'll be sitting in clover. We've freed the cash tied up in our present home
so it can work much harder for us. Will it work for you? The only way to
tell for sure is to run the numbers and see.
Maybe you don't want the hassle of home ownership again. Instead, you plan
to sell, invest the cash, and rent. Will that work? It could. It depends
on how much rent you will pay in retirement. A home mortgage tends to be
relatively stable through the years. Rent, though, has a nasty habit of
increasing every twelve months. If you can invest your money to pay for those
ever-increasing rent payments, then a lease may be an option worth considering.
Many retirees want the security of not having to pay rent or a mortgage.
There is nothing wrong with that. Instead of the scenarios outlined above,
you could just stay where you are. Alternatively, you could sell and pay
all cash for a cheaper home. Cash left over from the sale could then be invested
to throw off additional retirement income for your use. In either event,
when needed you can still get at the equity tied up in your home through
one of two ways in most states. The first method is through a home equity
loan (HEL) line of credit, and the other is through a reverse mortgage.
A HEL is nothing more than a loan secured by using your home as collateral.
Because it's a loan, it must be repaid with interest. Repayment starts
immediately, usually in the form of a monthly payment based on a 15-year
amortization schedule. For emergency cash, a HEL is a good vehicle. As a
means of regular income, it is not the route to take. If you need the loan
as income, then chances are you can't repay it. Failure to repay the debt
will result in a foreclosure on your home.
A reverse mortgage is a means of receiving a regular, untaxed income as a
loan against the equity you have in your home. The total loan amount is usually
fixed, and may be paid as a lump sum or in monthly installments over a fixed
period or for life. Unlike the HEL, though, this loan doesn't have to be
repaid until you die or sell your home. Then you or your estate repays all
loan proceeds with interest. The beauty of this loan is that it doesn't have
to be repaid until the house is sold and your legal obligation for repayment
is limited to the value of the home at that time. If the home declines in
value, you will never owe more than your equity in the home on its sale.
For elderly people living alone who are in need of cash, a reverse mortgage
is definitely an option to consider.
Whether you own or rent, sell or stay, recognize that your house is more
than a home. A home is a place of heartwarming memories, love, dreams, and
good feelings. Fools cherish the thoughts it invokes. But "home" is a mental
concept, and we can have a home virtually anywhere. (And hey, who knows?
Maybe soon in the future you'll just have a home in cyberspace!) A house
is a structure of sticks and bricks, of walls and beams. As such, it has
a monetary value. That value can and should be used when needed. As Fools,
our task is to determine if and when it is appropriate to do so.
Next up: The myth of lower taxes.
Next: What Uncle Same Taketh »
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