Retirement Planning
I am not retired yet, but expect to be in about a year. For the past 6 months I've been renting an apartment since I got divorced. My question is: Should I buy a place before I retire? I am NOT handy and I live in a HCOLA. If I buy something I am leaning toward a townhouse so the snow and yardwork are taken care of. I like my current rental apartment, but it is pricey and I don't feel 100% at home.
This feels like a nice transition space for now and I am near both my kids and my job. I like renting because I don't have any energy to take care of a home. But long-term, it would be nice to buy my own place and have a space for my kids that is completely ours. Where we can paint and decorate the way we want. My ex bought me out of the marital home, so he has a house and I don't.
Also, I worry about taking a big chunk from my nest egg to make a purchase. In that regard, I think maybe I should wait to buy? Let the money grow for another couple of years? Or would it be better to buy while I am still employed and trust that the investments will continue to replenish? My lease is good for another year, so I have time to decide. I have not yet gone to look at places. Still in the theoretical stage. Looking for some thoughts from you all. Thanks!
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What is your vision for retirement? If you plan to travel extensively, home ownership may make less sense.
Home maintenance never ends. Something to consider and budget for if you feel you don't have the energy to DIY. Ramit Sethi once wrote, "Your rent is the maximum you'll pay. Your mortgage is the minimum you'll pay."
If you'll be going the mortgage route after retiring, do your research on asset depletion mortgages before retiring so you can decide if that will work with the assets you have. This blog gives a good introduction.
https://accidentallyretired.com/financial/asset-based-depletion-mortgage/223
One factor to consider is that you have a big life transition coming up in 1 year when you expect to retire. Often big life transitions like this impact the equation as far as what makes the most sense from a housing perspective, and you can't really know what the new equation will look like until you're there. Which would tilt in favor of staying put at least until you retire - and even then I would likely wait for a year after retirement before making any big moves, since it will take a while to get a feel for your new life.
(My background: I FIRE'd over a year ago, and there was a lot of discussion over whether we should move or not - we ended up staying put due to not wanting to take our kid out of his school... we didn't really have a feel for how much of a factor that was when it was still mainly a job keeping us in one place.)
Anonymous
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7mo
Thanks! Yes, my fear was would I be able to get a mortgage if I am not working? So I felt like I "should" buy before I retire not after.
Do you plan to continue to live in the area for at the very least five years? If not, then I wouldn't bother to buy.
It is probably easier to get a mortgage when you're still employed, so yes, I guess if you want to buy I would try to buy before retiring. Make sure the house fits into your FI plan (don't buy too big a house - or - adapt your FI plan...).
Anonymous
·
7mo
Thanks! Yes. I plan to stay in this area.
Might even be difficult to find a rental after retiring. My MIL is retired and so doesn’t have a traditional income and she is looking into moving, but apartments she has looked at have a minimum monthly requirement based on income.
Has she actually been turned away because she doesn't have traditional income? Retirees rent places successfully all the time, so I have to imagine most companies do have a way of accounting for "income" from retirement accounts.
One that I know of so far. She is looking at others.
There are options for down payment assistance. Even if you don't need it, it saves you from withdrawing your own funds. My friend recently purchased a new town home in AZ with a 3.99% interest rate and the down payment covered.
Many specific financial factors are not known and advice on that level is therefore not possible. However, buying a house in a HCOLA area is not necessarily ideal for a long retirement - and not being able to repair and remodel / renovate your home is a significant drawback as well. It's cool to have a debt free home that you like - makes FIRE so much easier and predictable. No need to force it though. There is a good case for "just renting" as well. In your situation that seems to be the way to go. For now. If or when that changes, you will know.
I don't know if this is your case, but I find many "feel" their rental is expensive and don't actually compare costs to owning.
If you were to buy something, if you rented it out could you make 1% of the purchase price in monthly rent? If not, maybe renting isn't as pricy compared to buying as you feel.
Or you can compare all-on costs of both and see how much each costs. Just beware the tricky math on a purchase; many underestimate the costs by 20% or more!
I feel having a good handle on the relative comparison helps the next level of the discussion: "how do those numerical realities line up with life priorities and what you want for a fulfilling life?"
Seconding this. I think most people "throw away" a lot more owning a home than they realize in a lot of parts of the country. For example, locally, a 3bd/2ba sells for ~$400k with property taxes of $6,500 a year (NH, so we don't have income/sales taxes, just property taxes).
If you're going to buy and then sell within 5 years, you have the 6% sales cost ($24,000), five years of property taxes ($32,500), and ~$105k in interest (assuming 6.75% rate on $320k loan, since payments are very interest-heavy in the first five years), plus any repair/maintenance costs...never mind the opportunity cost of ~$27k (6% APY for 5 years) on the $80k down payment. That's $188,500 "thrown away" over five years, or ~$3,100 a month.
At least here, you can rent a similar house for 10-15% less than that with no responsibility for maintenance. Granted, property value may increase in five years. Or it may not. (It probably will, because the whole U.S. economy is so heavily dependent on mortgage-backed securities, which sort of requires a certain level of housing market inflation to be sustainable, but that's a tangent.) Rent is more likely to go up than down over that period. But if something happens in those five years? It's easier to get out of a lease than a mortgage.
Obviously your mileage and your math will vary, but don't overlook things like the heavy weight of interest at the front of a mortgage, or the opportunity cost on your down payment, or other big factors like that and just compare "monthly mortgage" to "monthly rent." Housing is primarily an expense, not an investment, whether you're buying or renting.
Thanks! I agree. I am definitely not looking at it as an investment. If anything, it could become an anchor. Maybe renting is the way to go for now.
Bryce and Kristy (from Millennial Revolution) have an entire section of their book, "Quit Like a Millionaire", where they specifically deal with accurately calculating/estimating the total cost of home ownership. Your comment is an excellent snapshot of the issue (i.e., that comparing the cost of rent to only the mortgage payment is a very inadequate comparison), and anyone who wants a more detailed treatment for a better understanding would be well served by checking out the discussion in "Quit Like a Millionaire".