You may not consider real estate and retirement in the same bucket of personal finance matters, but they’re closely intertwined: Both are the largest expenses you’ll fund in your lifetime, and how you approach and manage each goes hand in hand. Here are four ways to make sure that your financial approaches to real estate and retirement complement one another.
Realize the long-term value of the 30% rule.
While the current low mortgage interest rates can mean that your money goes further toward buying the home of your dreams, remember the 30% rule of housing before you shift your focus to a housing upgrade. According to the paper “Who Can Afford to Live in a Home?,”
prepared by the US Census Bureau, the 30% rule (which says that one's housing expenses should not exceed 30% of gross pretax income) was originally used as a public policy determination regarding housing affordability for the lowest income groups. When the cost of housing exceeds that amount, according to policymakers, homeowners’ discretionary spending is impacted, resulting in a so-called “housing burden.” In fact, before the mid-1990s, Fannie Mae
(OTC:FNMA) and Freddie Mac
(OTC:FMCC) would not purchase conventional loan mortgages unless the principal, interest, tax, and insurance payment did not exceed 28% of the borrower’s income, or 29% for an FHA insured loan.
Theoretically, the 30% rule shouldn’t be hard to achieve; it equates to about $2,000 per month for a person making $80,000 per year. Of course, housing costs aren’t limited to monthly mortgage payments; they include real estate taxes, maintenance, and perhaps even private mortgage insurance. In some areas of the country, the 30% rule easily covers the monthly payment to own a multi-bedroom home; in others, it barely pays the rent on a shoebox apartment. But before you deem it an impossible budgeting challenge, consider the impact it has on retirement savings. If the homeowner mentioned above exceeded the housing rule by just 5% and had a monthly housing expense of $2,333, he’d miss out on the opportunity to save $333 per month for retirement. Over the course of 30 years, that slight difference would amount to more than $190,000 that could have been saved -- assuming the money earned a conservative 3% annually.
Buy and sell when the time is right -- for you.
Recent data released by The National Association of Realtors indicates that sales of previously occupied homes are up 9.2% from 2011, taking the home buying market back up to levels not seen since 2007. Although the numbers do indicate signs of continued strength toward a housing market recovery, homeowners who’ve stayed in their home to ride out the housing market bottom should think twice before putting the “For Sale” sign in the yard just yet. As AP Economics Writer Christopher S. Rugaber
recently wrote, despite signs of hope, housing sales are still below the roughly 5.5 million benchmark that analysts require to declare a housing market healthy. Even if you’ll see a slight profit, remember that the costs to sell your home aren’t insignificant; being too eager could mean the difference between retiring sooner or later. Seattle area real estate broker Ardell DellaLoggia
estimates that a person selling a $400,000 property -- not at a loss -- will pay about $30,000 to $40,000 just to sell the home, once the costs for settlement of lienable utilities, broker commissions, excise tax, title insurance, escrow fees, and prorated real estate taxes are factored into the sale. If you’d realize more appreciation by holding onto your home a bit longer, that’s money you could use to grow retirement savings.
The lower your housing costs, the less impacted you are by Social Security changes.
Social Security funds are depleting, and the age at which you can maximize how much you collect is being pushed farther and farther. Under current law, full retirement age is currently 67 for everyone born in 1960 or later. The more you build your own reserves for retirement income, the more power you have in retiring on your terms. Regardless of the overall economy, the easiest way to ensure you can retire is to eliminate your mortgage payment early in the game, and dedicate those funds towards retirement savings. Consider the financial difference of buying a $275,000 home with a 15-year mortgage, versus a 30-year one. Under current mortgage rates, a homebuyer might secure a 15-year fixed rate loan at 2.79%, or a 30-year one at 3.59%. Though monthly payments on the 15-year loan are about $600 higher, that person would save $112,000 more in interest payments over the life of the loan than they would with a 30-year loan, and could begin dedicating the monthly payment toward retirement once the home is owned outright.
Consider where you can afford to grow old.
You know the saying about “location, location, location” and real estate? It’s especially meaningful in retirement. Consider where you invest in housing now, and how feasible it will be to maintain a residence when you have a potentially reduced income stream in retirement. According to 2011 US Census Bureau Data, a couple without a mortgage payment could live in sun-filled spots like Albuquerque, New Mexico, Augusta, Georgia, and Knoxville, Tennessee, for less than $400 per month. By contrast, Southern California and parts of the San Francisco Bay area, as well as east coast cities like Boston, New York, and Stamford, Connecticut, are among the most expensive places to reside.
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