Your home is an investment, it’s okay to love it, but do not fall in love with it. I was given this advice early on in my career from one of my favorite mentors, my uncle. As time passed, I learned to appreciate what my uncle was saying. Home may be where the heart is, but it can also be where the assets are, or at times, liabilities.
In the context of retirement planning, there are a myriad of puzzle pieces to consider, some of the most important being your health, your money, and of course your home. How you manage your home and your home equity in retirement depends on your personal situation.
Early on in your career, you likely had only one home, or you may have upgraded your home as your family and your career blossomed. Then, as time passed, you may have acquired multiple homes, possibly in different states. These homes may have become significant assets, which can present several planning opportunities, as well as challenges.
First, let’s think about your vision for retirement. Do you want to prioritize lifestyle over environment? During your more active, early retirement years of 65-75, choosing to downsize your home may make sense so that you can live comfortably while focusing on a busy lifestyle. On the flipside, some retirees may choose to upsize their home and lifestyle during the early retirement years; this may include being a member of a community with amenities that can offer more activities. At the extreme, we’ve even had some clients who are “homeless” during these years and choose to travel the world for a year or two before settling down.
Then comes the cost of home ownership. Expenses such as real estate taxes, insurance, maintenance and upkeep can add up. Understanding all of these costs is critical for retirement planning and making sure you do not outlive your assets. Being house poor, for most, is something to avoid. Having a mortgage, or not having a mortgage, is also an important financial decision. We do not believe “one size fits all” as relates to mortgages. Short-term loans can also make sense for liquidity purposes, especially during times of market volatility or when bridging the sale of another property or to bridge a construction project.
Taxes are another important factor. Many states have state income taxes, as well as estate and gift tax laws, that are less generous than the federal tax laws. Choosing one state over another in terms of where you domicile is an important financial and tax decision. For clients with multiple homes, choosing which home to make your “primary” residence is a strategic decision as relates to taxes. There are also generous tax rules today that relate to capital gains when selling your primary residence. Under current tax law, individuals are able to realize up to $250,000 of capital gains free of federal capital gains taxes, assuming the sale qualifies as a personal residence (up to $500,000 for married couples). With the significant real estate appreciation that we have experienced since the pandemic, this may present some unique opportunities for those looking to transition their primary residence.
Health often becomes a major consideration for retirees in the later years. For those who have multiple homes this may be a time to consider consolidating homes for simplification. Downsizing, or homes that offer little or no maintenance, can be a step in the right direction. A senior living community may be a viable option too. This is often a tougher decision, and family dynamics can play a role. Depending on the community and type of contract, there can be very significant tax and investment considerations when purchasing into a senior living community. You should seek advice from your financial and tax team before signing a contract.
Retirement can be a world of possibilities and how your home (or homes) plays a role in your financial plan can change over time depending on your financial, health and family situation – the key is to be flexible as your situation changes. Homes have a sentimental factor, but pushing past those emotions can help you be more objective in evaluating your home as an asset or a liability.
Remember Uncle Joe’s advice, “Love your home but be careful not to fall in love with it.”
If you are in transition or are considering making a transition as relates to your home, we welcome the opportunity to partner with you on your financial planning – this can be a daunting process but may present some unique planning opportunities for you and your family.