By Michelle Buonincontri
Retirement is a time when folks are confronted with lifestyle choices, income needs and expenses, as well as balancing a new normal. Deciding to keep or sell the family home can be emotional and complicated.
According to the National Center for Health Statistics, the divorce rate among those 55 and older has roughly doubled from 1990 through 2015. The family home is frequently the greatest asset, and the decision to keep or sell the home can be inflamed during a so-called "gray divorce" that occurs shortly before or during retirement. Whether or not there are children still living in the home, the house is an emotional asset and, many times, not one a spouse is willing to part with.
Read more from Pew Research Center: Led by Baby Boomers, divorce rates climb for America's 50+ population.
In divorce, with emotions running high and diminished resources (due to a drop in household income, reduced assets and cash flow), many spouses may find themselves vulnerable. This may be the first time a spouse must balance a budget or pay expenses. Financial education is paramount, and it is critical for the spouse that took the financial backseat during the marriage to understand their post-divorce spending plan, identify gaps in retirement, and develop good skills in cash management, credit management and possibly debt management, so that they may take control and create their best possible long-term financial outcome in retirement.
Whether divorce is on the horizon or not, understanding retirement cash flow, expenses (the household balance sheet) and lifestyle goals is the foundation of the decision process.
Here are some additional things to consider when deciding whether to keep the house
Potential rental income: Maybe you're set on staying in the family home and can't afford it. Or maybe you can and would like some extra cash to save or travel. You may consider sectioning off part of your home and renting it, even on a semi-permanent basis (while you travel), or renting just a room through websites like Airbnb or VRBO.
I recently spent some time in Flagstaff and stayed with a retired couple who were doing just that - and they were loving it! While there, I met several of their retired friends who were doing the same to supplement their income and have the lifestyle choices they wanted.
Potential home equity: If you're eligible, a reverse mortgage can meet the financial goals of lifestyle, longevity and liquidity. Payments can offset long-term care costs, pay for in-home nursing so that you stay in your home rather than going to a nursing facility, or buy out a spouse's equity in the home as part of a divorce settlement. You can even use this as an income source to limit sequence risk and preserve retirement assets when the market is down (which will help your money last longer) or bridge your income until Social Security or pension benefits kick in. Additionally, because these payments are not considered income but rather a "loan advance," the payments are not taxable and do not affect Social Security taxability or Medicare benefits.
Note that if, at loan payoff, the home is upside-down - with the balance owed exceeding the home's market value - it's not a problem, the shortfall will not be owed to the mortgage holder.
Read How to Use Reverse Mortgages to Secure Your Retirement by Wade Pfau for more information.
Tip: If you are not eligible for a reverse mortgage or dislike the idea of having one, you may consider tapping the equity in your home, if applicable, with a home equity line of credit or loan.
Leaving a legacy/reducing taxes: Our current tax laws have a loophole that allows you to avoid potential capital gain taxes on your home by leaving appreciated real estate to your beneficiaries. This happens by providing the recipient(s) with a "step-up in cost basis" to the fair market value of the property on the date the asset is inherited.
Avoid the financial costs of selling/moving: Selling your home will most likely require repairs/updates in order to get the best price. Commissions of 6% or more could apply. Don't forget the taxes. If your capital gain exceeds $500,000 for a couple or $250,000 for a single/widow/divorcee, then capital gains taxes could take a chunk out of your net proceeds and you're not walking away with as much as you thought.
You're older now too, so there will most likely be a cost associated with hiring a mover, a smaller place may require new smaller furniture, and there are closing costs if you are buying.
Maintain emotional stability and friendships: Moving can have emotional costs - the relationships you are leaving behind. As we get older, developing those friendships become more difficult because we are in a different stage of our life and there may even be cultural hindrances in the new area that you move to. Staying in the family home negates this challenge.
My retired parents have been in Arizona for six years. The first community in which they lived was very transient with "snow birds" only living in the community six months out of the year, which created limited socialization opportunities. They have since moved and things have improved, but there are also undeniable social differences between the East Coast, Midwest and Western parts of the U.S. that still make them homesick.
Cost/cash-flow: The costs of needed repairs and upgrades, annually increasing inflation-adjusted expenses of maintaining the home, insurance and real estate taxes may exceed your retirement income or cut into the disposable income needed for the lifestyle goals you had for retirement. Consequently, you could run out of money in retirement. It may be cheaper to downsize (if there are actually reduced expenses) and invest the net proceeds to increase cash flow.
One client I worked with was set to retire in five years. She had a home in Phoenix she was going to sell, and property in Utah on which she was going to build a home. After determining the costs associated with building that new home, the mortgage, travel budget, streams of income and expenses on her current home, we determined that she would need $90,000-plus in gross income per year, but would have only about $60,000 in retirement income. She weighed her options, including delaying retirement and saving longer, working part time, reducing her travel budget, and not building the new house and moving. For her, retiring in five years and traveling took precedence, so she will stay in her current home.
Financial costs of moving: The market may be higher when you are ready to sell and the financial expenses of moving (previously cited) could be greater.
Mortgage interest: You may no longer have a tax benefit because of the increased standard deduction limits effective in 2018.
Non-deductibility of current home equity line of credit interest on your home for personal expense, i.e. car/boat purchase, tuition expenses, divorce attorney fees.
Housing market high: Holding off on a sale and not capturing the high cost of the real estate market now may leave money on the table later when you sell.
Lack of freedom as compared to other alternative residence choices such as renting or owning an RV.
Retirement is a time of change and should be a time of much enjoyment, if planned properly. Take the necessary steps to understand your current situation and options before deciding to keep or sell your family home.
About the author: Michelle Buonincontri, is a Certified Financial Planner™, Certified Divorce Financial Analyst (CDFA™), Collaboratively trained financial neutral, mediator and founder of Being Mindful in Divorce. With over 25 years in financial services, a focus in investments, retirement, tax and divorce planning, Michelle works as a financial coach with Clearview Financial Strategies Inc., is a blogger at Being Mindful in Divorce, a leader in the "Second Saturday" program for divorcing individuals, a presenter at Fresh Start Women's Foundation in Phoenix, a volunteer Financial Coach for Savvy Ladies, a contributing writer to Investopedia and previous Board of Director member for the Financial Planning Association (FPA) serving in both in Arizona and New York.