One of the greatest dangers to a retirement plan is inflation and historically, owning real estate has been a great way to fight it. Chuck Robinson from Sensible Money goes into detail about how your primary residence and rental property factor into retirement income and planning.
A retirement income distribution plan involves having your assets being paid out during retirement. When it comes to this plan, residential real estate is considered an asset but is not involved in the plan. Robinson clarifies that instead, the property along with the equity that's in that home is put on the balance sheet, a statement detailing the balance of income and expenditure over the preceding period.
He also mentions that some people are mortgage-free when they retire, but he doesn't really recommend doing this. “Honestly in many cases, especially where you have very low-interest rates, we think it has historically made more sense to leverage up and mortgage that home and invest that money in equities.”
There’s a lot of emotional attachment to the “family home,” but people need to look into the future when they are 80+ years of age and think about how owning the home will affect them then. From there, they either downsize or move to a care facility, but according to Robinson, most of his clients choose to downsize.
Robinson says, "for a large number of my clients, I'm a huge advocate of them thinking about downsizing in real estate, as a sale of their current home, freeing up a huge amount of capital — $500,000 in tax-free, plus the basis of whatever they paid for the home. So, if they paid a million dollars for the home and it's worth $1,500,000 today, essentially they're getting $1,500,000 tax-free. Even loan's worth 2 million, they're only paying long-term capital gains on $500,000 of it.”
Whether you decide to downsize or move into a care facility, don’t wait too long to do it. If you wait too long, you might be too weakened both physically and mentally to make the move.
Reverse mortgages have been controversial over the last few decades. They’ve gotten a bad rap because if your heirs aren’t aware of it, it can hurt them in the long-run. Despite the negativity, Robinson got one for himself.
“I like it," he says, "because I have no mortgage payment now, and you have a choice as to whether you want to pay the interest. They [also] increase the amount that you can borrow on every year. It's now at $900,000, so you can borrow $450,000-500,000 on a reverse mortgage." This money could be very helpful when you decide to move out of your home in your eighties.
Still, it’s very important to educate your heirs about your plans for a reverse mortgage. When you die or if you move to a care facility, they have six months to sell the house. More time can be requested, but it's important to put the house up for sale immediately.
Rental Income Property
For those who already have rental property prior to retirement and don’t mind managing it, it might be a good idea to keep it from age 65 to 80. However, for those who want to start owning rental property at the age of 65, it's not as easy as it looks.
“You hear these great tales of people who turn a modicum of investment money into this huge fortune,” Robinson says. “I'm not against it, but I caution people in retirement to think about how long do you want to keep doing this? 65? Yes. 75? Maybe. 85? Uh-uh.”
Once you’re in your eighties and you’re ready to give up rental property, it’s important to think about and plan exit strategies. Determining your tax situation helps immensely, especially if you evaluate it before you collect Social Security or your required minimum distributions kick in. This affects the balance sheet by allowing more capital gains to be claimed.