Rank from one to three the following: Making the mortgage payment, having fun, saving for retirement. No changes, huh? It’s no character flaw merely human nature. Until agriculture was invented five or six thousand years ago, long term planning meant finding something to eat day after tomorrow. The problem is we delude ourselves into believing mortgage payments and saving are economically equivalent. Why not? We kill two birds with one stone and can have fun.
An unfortunate corollary is ending up with more home than necessary. Don’t forget a house is a consuming asset. Just keeping the sucker running costs between three and five percent annually. Take the time, do the math. These operating expenses include taxes, insurance, maintenance and utilities but not mortgage payments. The deck is stacked against you, too. The guidelines mortgage companies and banks use practically ensure you will buy too much house. The mortgage industry wants to loan you the maximum amount you can painfully repay. Understand the game.
For decades a surefire way to financial security was to have your home appreciate in value, sell it when you retire and move to a new place. That strategy went out with dial-up internet. Still, many retirees find themselves house poor with more assets in home equity than retirement savings. A recent study found only the top 20 percent of households had more retirement savings (401K, IRAs, taxable savings or annuities) than the value of their home. For singles it was more dramatic with only 10 percent of single households having financial assets greater than the value of their home.
Your goal should be a debt-free home in retirement and more retirement savings than home equity. If you are retired or approaching retirement and have more home equity than savings, owning less house is essential. I don’t worry so much about younger people. Most of them have figured out, either vicariously or the hard way, the “my-house-will-make-me-rich” fallacy. Buy a smaller house than the mortgage guidelines allow or even rent. Then live within your means.
When doing retirement projections seldom do I consider home equity as a retirement asset like an IRA or a 401K. I include home equity on the balance sheet but you have to live somewhere and it’s not like you can sell the garage if you need $20,000. Home equity should be a retirement fallback position or rally point.
What about reverse mortgages? Washed-up entertainers peddling reverse mortgages registers positive on my BS detector. But Suze Orman doesn’t like reverse mortgages so color me conflicted. Deciding to use a reverse mortgage is extremely complex. Plus reverse mortgages are very expensive. The amount you can “borrow” is based on the value of your home and expected longevity. When the younger spouse is over 70 and you have no desire to keep the home in the family, mull over a reverse mortgage. Understand that the loan will have to be repaid if you move, say to assisted living, or at the last spouse’s death. Be careful when an asset manager recommends a reverse mortgage. A reverse mortgage means more billable assets for them since you won’t be spending down investments.
Even though Buz Livingston is a fee-only Certified Financial Planner this should not be considered personal advice. For specific advice visit us online at www.livingstonfinancial.net or at our new office in