How you pay for your retirement home can have a noteworthy pecuniary impact during your retirement years. Choosing the right option should take into account retirement income, tax bracket, lifestyle, savings, health, economic and market conditions.
For example, income taken out of an IRA to pay for a retirement home is taxable and could cost around 33% the cost of a $300,000 property or approximately $100,000. In this case financing is probably the better choice. If the money for the retirement home is coming from the sale of another property or is already available in capital savings, how that money is allocated in to retirement property can potentially raise or lower standard of living significantly.
For example, retirement home funds divided into two parts with which two smaller homes rather than one larger home are purchased. This option provides potential income through rental of the second property and capital savings in both the homes. In this situation, paying cash is a good choice.
For retirees who plan on taking advantage of cost of living differentials either domestically or abroad, a cost and income opportunity may await depending on the locations. To illustrate, according to CNN Money online what would cost $30,000 in Suburban Washington D.C. in November 2009, could be bought for $25,649 in Flagstaff, Arizona and $20,987 in Kansas City, Missouri. In terms of property values, these numbers can be even more differentiated depending on the real estate market at any given time.
When these types of differentials favor the retiree, the cash option may be better due to the lower capital requirements in the lower of two cost differentiated locations. Another money saving option for traveling retirees is the purchase or financing of a used recreational vehicle or sail boat which in some cases cost a fraction of a home’s market price. With registration in a no vehicle or boat property tax state such as Delaware you may both save money in taxes and increase available money for investment returns.
So, if cash is used to buy a $100,000 yacht rather than a $200,000 home, the remaining $100,000 may yield an extra $500.00/month in income while preserving capital value. If you already have a retirement income and don’t need the extra $500 per month that money could continue to grow tax free in a Roth IRA if the money is already in one. Mortgage products and market conditions can also mean the difference between lousy financing and a good mortgage. When you review a mortgage product it can be a good idea to ask questions, like:
- Is there a pre-payment penalty?
- Is the mortgage recourse or non-recourse?
- Do the mortgage terms allow rental?
- Are there any additional closing cost fees, surcharges or expenses? I
- Is it a fixed or variable rate?
Additionally, keeping track of national housing statistics such as construction and lending trends can help you get a better idea of where your property value and mortgage lending rates may be headed.
Advantages and disadvantages of cash and financing of retirement homes also depend on your credit rating, size of down payment, investment profile, income objectives, and financial goals.
For retirement homebuyers with less than average credit, mortgage costs may be higher making the cash option or alternative housing arrangements wiser in terms of cost. However, for retirees with a sizeable nest egg, a mortgage may be just the way to lower the tax bracket far enough to offset the cost of the mortgage and reinvest cash elsewhere while building principal and equity in the retirement home.