Analyzing Moving

When Laura and Rick Idealists (a real couple but obviously not their real names) were in their middle-aged years and still working, they imagined a slower-paced life in a less-crowded and lower-cost area for their retirement. Like many folks dreaming about and envisioning retirement, the Idealists believed that once unchained from needing to work, they would have much better choices for places to live.

As they neared and finally entered retirement, the Idealists didn’t move. Upon reflection, they better realized and appreciated the joy brought to them by their local friends, favorite restaurants, and service providers (including their medical providers). When confronted with the reality of moving from their local area, they realized that they’d lose a lot of personal connections that meant so much to them.

Some folks who move when they retire are motivated largely or in part by the attraction of reducing their expenses. Some do lower their living costs, and some don’t. Their happiness varies with their new locations as well. This section discusses the appeal and realities of moving and the issues to weigh and contemplate.

Considering the pros and cons of moving

Although many folks are content to and prefer to stay put when they retire, others wish to move. Among the primary motivations for retirees moving are the following:

Being closer to family and good friends: Because jobs and careers take folks to locations that may not be their first or even second or third choices location-wise, it’s no surprise that some retirees find themselves geographically isolated from their closest relatives and even best friends. Especially if you have adult children and possibly grandchildren living elsewhere, the pull to move closer to them can be strong.

Clearly, moving closer to family and friends may have little or nothing to do with your finances, but that doesn’t mean you should take the decision lightly. At a minimum, you should discuss your feelings and possible plans with the folks to whom you’d be moving near. Also, consider the possibility that someday these relatives may need or want to move somewhere else.
Living in a better climate: With all the free time that retirement generally entails, climate escalates in importance for some people. Many older people prefer more temperate climates — that is, fewer days of extreme heat or cold. Think locales near Santa Barbara and San Diego rather than Houston or Minneapolis. Some folks with particular health conditions such as allergies or asthma find that moving to a temperate climate helps improve their symptoms and health.
Reducing their cost of living: During their working years, many people live in more congested urban or near-urban areas with pricey housing and property taxes. If you have kids, you’re probably also paying a premium to live in an area with better public schools. No longer constrained by where work is located or the need for access to good schools, you can consider moving to lower-cost areas.
Selecting housing that’s user friendly for the elderly: As people age, their mobility and coordination inevitably decline, albeit at different rates for different people. So the housing you choose to live in during your younger years may no longer make sense. Steep driveways, stairways to the house and in the house, and other design issues may be decidedly unfriendly and potentially dangerous to your aging body.

Moving does have its downsides. And people often overlook them in the excitement and allure of believing the grass is greener elsewhere. Check out these downsides to moving:

Living costs may not decrease enough or at all. The mistake all too many folks make is that they assume their overall living costs will be lower after a move to an area that attracts them with, for example, lower-cost housing. You must and should examine all your living expenses and how they may change with a proposed move.
You may introduce other negatives. You may be successful in reducing your living costs with a move, but you also may find yourself in an area with other problems — more crime, traffic congestion, higher insurance costs on your home and car, and so on. Minimize your chances for disappointment by doing sufficient research before you make a decision to move.
Moving is costly. Although you may be able to save money after your move is complete, be sure to make realistic estimates of your likely moving costs and how many years it will take to recoup them. The biggest expenses include real estate transaction costs and moving company costs.

Here’s the bottom line: To make an informed decision, do all your homework and research concerning the topics discussed in this section. Don’t focus on one reason to move. And don’t make assumptions, such as your living costs will be lower because housing costs less in a new community. Get the facts on how all your living costs will change with a move. The best sources are people you know who already live there. You can consult official sources, such as chambers of commerce and realtors, but they may not be objective.

Eyeing the options for where you can move

Traditional retirement living and housing choices are changing. New generations of retirees are looking for new living experiences, and developers are obliging, giving older Americans more choices for living arrangements than ever before. These new choices involve more than simply relocating outside the traditional retirement Sunbelt havens like Florida and Arizona. They also involve different types of housing and living arrangements and different types of activities in the communities.

One reason for the new senior living choices is that people are retiring earlier. At some adult communities, about one-third of residents are under age 65. Those under age 55 can make up 10 percent or more of the residents in some communities.

Another reason for the changes is that today’s longer retirements have more stages than in the past, generally up to three stages. Each stage has a range of living choices. And, of course, not everyone goes through all these stages or even any of them. The following sections identify some specific choices you have if you decide to move during retirement.

Retirement housing decisions are more complicated than ever because you have more choices. Review all your options so you’ll be happy with the choice you make until you’re ready to move to the next stage.

Stage No. 1: Downsizing

When folks downsize — that is, move to a smaller home — the goal is usually to maintain the same contacts and activities while shedding the labor and costs of maintaining a larger home. When you hit this stage, you’ve decided it’s time to stop mowing the lawn, raking leaves, checking the gutters, and maintaining the mechanical systems. You also don’t want to pay for rooms you aren’t using.

You have several options for downsizing. You can move to a smaller house, townhouse, or condominium in a regular development. In this case, your neighbors will consist of those from all the age groups. Or you can move to a planned senior community (or age-restricted community) where people are similar in age, such as those discussed in the next section.

Stage No. 2: Looking at retirement communities

You may consider moving into a retirement community after you retire. Oftentimes, these communities are in warmer locations, such as sunny Florida or Arizona. If you’re considering moving into a retirement community, make sure you look at the following factors:

The demographics of the community and how that appeals to you: Some seniors prefer to be around people their own age; others prefer more diversity. If you’re a young retiree, you may want to check the average age in a senior community, because in some the average age is 75 or older. An adult community also may make you feel isolated from your family and friends, though you do have the opportunity to make new friends. A community that includes all ages may be noisier, less well kept, and keep later hours. You may want to visit at different times of the day and week to get a good flavor of the lifestyle.
The types of activities offered on-site and in the surrounding community: Each type of community will have its own activities plus the activities in the surrounding community. A development built for seniors may provide services that are helpful to seniors, such as laundry, housecleaning, and on-grounds restaurants. Many newer senior communities also have amenities such as spas, golf courses, health clubs, and Internet centers. They can be more like resorts or country clubs than traditional adult communities or regular developments. Also, be sure to consider how your current activities would be affected.

The adult communities outside Florida and Arizona tend to have younger residents than those in the traditional retirement states. Some university towns are also courting retirees and seniors. You may have more variety in your lifestyle by choosing a senior community located in an area that isn’t a traditional senior haven. Newer communities also have up-to-date features such as wiring for high-speed Internet.

Stage No. 3: Housing that’s near family and has healthcare

The third stage of retirement often involves moving near friends and family, especially grandchildren, and moving into traditional senior housing with some healthcare facilities on premises. This stage has four basic choices when it comes to housing:

Independent living: This essentially entails living in an apartment or condo complex for seniors. As part of your monthly rental, you get some basic services, such as housekeeping, transportation, activities, and some meals.
Assisted living: This type of housing offers additional services and is for someone who needs help with two or more of the basic activities of daily living (bathing, dressing, walking, and so on). You may be able to avoid or delay this option by having in-home care at your existing residence.
Nursing home: This option is for someone who needs daily medical care help.
Continuing care retirement community (CCRC): This option bundles all the preceding living arrangements into one. You can start in independent living or assisted living, and then as your needs change, you’re guaranteed a place in the other types of care. You only have to move to another location in the same community instead of having to look for a different facility and moving there. CCRCs are becoming very popular and are being built all over the country.

There’s no one right answer in terms of housing. Each person’s situation and preferences are unique, so explore your options and select the choice that feels right for your situation. Your doctor or other medical professional may direct you to one of the options. You also may find objective advice from your local Area Office on Aging or other local government sources.

THE UPS AND DOWNS OF COMMUNITY ASSOCIATIONS

When you move into a planned community at any of the stages of retirement, you also face the issue of community association. This group makes and enforces the rules for the community. It can also set dues and determine the amount of spending on common areas.

The associations and people involved in community associations sometimes make living in a community unpleasant. Some people abuse the power of the association. Others in the community may want dues as low as possible and oppose spending for almost anything. As you can imagine, conflicting personalities can get involved, and matters can escalate. In the worst case, lawsuits are filed by all sides while the community deteriorates.

Your best bet if you’re new to the area is to review past minutes of the association’s meetings and back issues of any newsletters it publishes. Interview residents who will candidly discuss the status of things. These are definitely things you won’t hear from the sales personnel, but they’re things you should know before making a decision.

Tapping Your Home’s Equity: Reverse Mortgages

If you own the same home during most of the decades of your adult life, you’ll probably have some decent equity accumulated in it. You may want to tap that equity to supplement your retirement income. For example, you can sell your home, buy a smaller, less costly property, and use the profit you make to finance your retirement.

Another way to tap into your equity is through a reverse mortgage, also known as a home equity conversion mortgage (HECM), which enables you through a loan to receive tax-free income on your home’s equity while still living in the home.

Reverse mortgages fill a void and are just beginning to tap into growing demand. The first reverse mortgage was actually done generations ago — in 1961 to be exact. Clearly, it took many years for them to really begin to take hold, but now more than 100,000 are done on an annual basis.

The following sections outline the specifics of reverse mortgages, including how they work and how to determine whether one is right for you. This is just to whet your appetite. Book 6, Chapter 2 covers reverse mortgages in much more detail.

Defining terms and costs

With a reverse mortgage, the lender pays you (via lump sum, monthly payments, or a credit line), and the accumulated loan balance and interest is paid off when your home is sold or you pass away. The typical borrower is a widow who’s 70 years old or older and running out of money, wants to stay in her home, and needs money for basic living expenses or for important home-maintenance projects such as replacing a leaky roof.

So are you wondering whether you qualify? Here are the basic standards of eligibility:

You, the homeowner, must be at least 62 years of age.
You must use the home as your principal residence.
You must have any outstanding debt against the home paid in full. (Co-op apartments generally aren’t eligible for a reverse mortgage.)

Retirees who have taken a reverse mortgage generally say it has been a good experience for them. They often cite that the extra income has allowed them to keep up a home’s maintenance, pay medical and other costs, avoid having to scrimp so much on things like eating out sometimes, and gain peace of mind not having to make house payments.

You can use a reverse mortgage in several ways. You can take a lump sum and use it to pay medical bills or other debt, make needed repairs on the home, or pay other expenses. You can also set it up to pay you a fixed amount each month. Or you can set up a line of credit that you tap only when you need cash, such as when an unexpected or larger expense comes up. You can also tap the line of credit when investment markets take a tumble and you don’t want to draw from your investment accounts until they recover at least some of the losses. The nice thing about the home equity line of credit (also called the Standby HECM) is that you can pay it down and restore the full line of credit.

Reverse mortgages aren’t free of their downsides. Keep the following in mind:

The effective interest rate can vary greatly. With their high upfront costs, the effective interest rate (which factors in all the fees and interest you pay relative to the number of years you actually keep the loan) on most reverse mortgages easily jumps into the double-digit realm if you stay only a few years into the loan.
They can be complicated to understand and compare. Your effective interest rate varies greatly depending on how long you’re in the home and using the loan, the timing and size of payments you receive, and your home’s value over time. One unknown that you can’t control is if an extended nursing home stay keeps you out of your home for 12 months and forces the sale of your home. In such a situation, at least the proceeds from the sale could be used toward the nursing home.

On the flip side, some aspects to qualifying for and having a reverse mortgage are actually easier than with a traditional mortgage. Consider the following:

You don’t need to have any income. Income isn’t important because you’re not making any payments. The loan balance is accumulating against the value of your home, and it gets paid when the home is sold.
You don’t need good credit. You’re not borrowing money, so your credit score doesn’t matter.
You can’t lose your home for failing to make payments, because there are none. Reverse mortgages are nonrecourse loans, which means that the lender can’t take your home if you default on the loan.

Determining whether a reverse mortgage is right for you

To consider whether a reverse mortgage may make sense for you, consider the following:

Start with nonfinancial considerations. Do you want to keep your current home and neighborhood? What’s your comfort level with the size of your home and the associated upkeep? Consider whether you want to stay in your home for the foreseeable future or would rather tap into your home’s equity by moving and downsizing to a smaller home or by simply renting.
Discuss your explorations and concerns with your family. Make sure everyone is aware of the range of options. Discussion and brainstorming may lead you to a better solution.
Understand what a reverse mortgage can do for you compared to a home equity loan. Part of the appeal of a reverse mortgage is the lack of attractive alternatives if you want to stay in your home. For example, with a home equity loan, the big challenges are qualifying for a loan when you have limited income and making the required payments when you do get a loan. Home equity loans are recourse loans, which means that if you’re unable to keep up with payments later in retirement, the lender can foreclose.

Also know that any money invested generating investment income would be taxed. Most seniors don’t like taking risks with their investments, so invested home equity money would be unlikely to generate high enough returns to cover the loan’s interest costs.

Searching for more information on reverse mortgages

Turn to Book 6, Chapter 2 for much more on reverse mortgages. If you’re seriously considering a reverse mortgage, you may have more particular questions about the specifics that aren’t covered in either chapter. If so, visit the AARP website at www.aarp.org/revmort for lots of helpful information; for referrals to free independent reverse mortgage counselors, call them at 800-209-8085.

Looking at Tax Issues Regarding Your Housing Decisions

Whenever you approach the decision as to what to do with your home, you should explore your options and be aware of important tax issues that come into play. That’s what this section is about.

Being aware of capital gains exclusion rules

When you sell your home, you may be able to shelter a substantial amount of capital gains (the difference between your home’s selling price and what you paid for it plus improvements over the years) that you have in the property.

How much? You can avoid capital gains taxes on up to $250,000 of profit if you own the property as a single person and up to $500,000 for married couples who file their taxes jointly. Profits that exceed these amounts are taxed at the relatively low long-term capital gains tax rates, which max out at 20 percent at the federal level. The Affordable Care Act (commonly known as Obamacare) can add another 3.8 percent to this for high-income earners. You may use this tax exclusion once every two years. And you must have used the home as your principal residence for at least two of the previous five years for it to qualify.

Converting your home to a rental: Yes or no?

Selling your home may take longer than you expected, particularly if you try to sell during a slumping real estate market as many parts of the country experienced in the late 2000s. If you overprice your home, you also may experience some delay in selling your home.

To help improve their cash flow if their house is sitting vacant, some home sellers rent the home while trying to sell it. Tread lightly here, because this tactic can cause you major tax trouble.

If you stop trying to sell your home and continue renting it, the Internal Revenue Service (IRS) considers that you’ve converted your home into a rental property. If you then sell the property, it will no longer be eligible for the home ownership capital gains tax exclusion (see the previous section) when it wasn’t your principal residence during at least two of the five years preceding the sale. In this case, your profit from the sale will be taxable.

You may be able to shelter your rental property sale profits from capital gains taxation. You need to do a so-called like-kind, 1031 Starker exchange. Check out the latest edition of Eric Tyson’s book Real Estate Investing For Dummies (Wiley, 2015) for more details, and be sure to consult a competent tax advisor as well.

Making Important Housing Decisions