The average American consumer that’s going into retirement usually makes some type of real estate decision, whether it’s to downsize to a smaller home, relocate to another state or renovate their home so that it’s more accessible.
Unfortunately, there are several mistakes that retirees make when it comes to real estate that can affect them negatively. Larry Luxenberg, managing partner with Lexington Avenue Capital Management, says that “Real estate is usually one of the biggest asset retirees have, but it’s the area with the most emotional attachment, and the place where it’s very easy to mess up.”
Mr. Luxenberg makes a good point, and below we’ve put together 5 of the most common mistakes that retirees make when it comes to real estate. Enjoy.
Real estate Mistake 1: Waiting too long to downsize.
Here’s a fact; the bigger your home is, the more energy it uses and the bigger the costs are to maintain it. Things like real estate taxes, homeowners insurance premiums and so forth don’t go down once you reach retirement, and the longer you wait to downsize to a smaller home, the more of your retirement savings you’ll spend on those expenses.
Thomas Scanlon, an advisor with financial firm Raymond James out of Manchester, Connecticut, says that “Lots of folks wait until post-college, and then children boomerang into the basement. It could be an 8 to 10 year run of having more home than they need.”
Real estate Mistake 2: Not taking the proceeds from downsizing and investing them.
Making the decision to downsize to a smaller home is a good one, especially if the end result is that you have extra money to put towards your retirement. Most people don’t invest that money however, and either spend it unwisely or put it in a basic savings account where it gains very little, if any, interest.
Scott Bishop, the director of financial planning with STA Wealth Advisors in Houston, suggests that living on the home equity money first would allow a retiree to leave their retirement funds untouched for a while longer, allowing them to grow at the same time. He also suggests that consumers consider the implications of taxes when deciding what money to use first.
Real estate Mistake 3: Maintaining 2 homes at the same time.
In the northeastern United States, including New York, Pennsylvania, Connecticut and other northern states, many people have one home and then a second in a warmer climate like South Carolina or Florida. These people are referred to as “snowbirds” and live part-time in both locations.
While this might be feasible when a consumer is still working, after retiring, having 2 homes at the same time can be a definite drain on retirement finances, for obvious reasons.
Real estate Mistake 4: Going into retirement with a mortgage.
While it’s true that mortgage rates are very favorable right now, and that mortgage interest can be deducted on taxes, the tax deduction isn’t significant enough for most retirees. Obviously, not having a mortgage in retirement will keep expenses lower and, in many cases, might allow a retiree to delay taking their Social Security distributions, which will allow those distributions to increase. Most financial experts also recommend that a consumer 50 years of age or older doesn’t buy a home because that would mean taking a mortgage very far into retirement.
Real estate Mistake 5: Not performing your due diligence before relocating.
Many soon-to-be retirees decide to move to a sunnier and warmer climate to retire, and make the mistake of purchasing a new home before performing their due diligence to find out what the tax situation will be like. They also overlook the obvious change in the cost of living in their new state as well, and the changes in healthcare options that they’ll have.
Researching any new city or state before relocating is vitally important so that, as you downsize to decrease your expenses, you don’t increase them in other areas because of taxes, cost-of-living or healthcare.
If you have questions or concerns about retiring, or your retirement accounts, please send us an email or leave a comment and we will get back to you with answers and advice.