I recently read a book where the author gives financial advice regarding housing for seniors.
These options included:
-Selling the Home and Renting
For some people I agree that downsizing may make sense where they can buy a home that better suits them in the stage of life they are in (i.e. empty nesters, may not be able to navigate the stairs, don’t need as big of a home, may not want to maintain a larger home etc.).
Also, if a senior is up for cohabiting that may also be a good option to pursue. There are definitely trade offs and sacrifices that would need to be made.
The one that really got me thinking was selling the home and renting. So, let’s explore that.
Let’s say at age 62 a couple in Colorado sells their home, pay the 6% realtor fees, and the net $500,000.
Then they rent for the next 36 years (financial planners say to plan for 35 years in retirement), starting at $1500/mo, with a 2% increase per year. They pay for the rent from the $500,000 they invest. At the end of 36 years, they will have spent more than $800,000 and still have their nest egg of $500,000 as they just used the growth of the investment to pay the rent. In this case we will say they still had other expenses such as internet, trash, utilities, cable tv, etc just like if they owned a home. So, that is an apples to apples comparison.
If they stay in their home, which is free and clear, valued at $500,000, and at age 62 they take out a reverse mortgage (cost approximately 4%, paid from equity), and $250,000 of that is in a line of credit that grows 4% a year on average, at age 80 they will have $500,000, at age 98, they will have $1,000,000 they can draw on tax free. And they also will see, on average, 4% appreciation, so at age 80 the home is worth $1,000,000, at age 98 the home is worth $2,000,000. (using the rule of 72, how fast money doubles).
They are able to stay at home, maintain their independence, retain ownership on title, gain access to their equity tax free (which they can use however they wish except purchase an annuity), transfer responsibility of repayment of the loan from themselves to the home (which can be paid off when they permanently move out, and there is no pre-payment penalty) and never have a mandatory, monthly PI mortgage payment.
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