My wife and I are 64 and 65 years old, respectively. I plan on retiring in two years when I’ll be fully vested with my current employer, avoiding early stock withdrawal penalties, and be closer to tapping into Social Security benefits. Currently we have $1.5 million in 401(k) investments, in moderate to aggressive funds, and a few small IRAs. We also have about $600,000 in various dividend earning stocks, including the mentioned company stock, as well as annuities. We have no debts of any kind and are currently living in a two-family property that we own, mortgage free. Our net income from the rented unit is approximately $1,500/month.
Our “perfect world” goals for retirement is to be closer to family and own a modest home in California, with an ADU (Affordable Dwelling Unit) or home with some small additional rental income, and spend months at a time traveling abroad. We are not “luxury” travelers, enjoy modest traveling and prefer the B&B stays.
We were very fortunate to be able to tap into the frenetic real-estate market last year and sell our main residence and have $1.1 million to invest in our next home. We’re now on the other side of that market and will most likely be forced to buy a property at an inflated price. Our concern is not getting much for our money, but moreover putting all our cash into an expensive home may not make sense, given the traveling we want to do.
We plan to keep and rent both units of our current two-family. Should we invest that large amount of cash and rent a small apartment near our family, or bite the bullet and move forward with purchasing an expensive home?
See: We have $1.5 million we don’t intend to ever use in retirement – how do we invest it if we plan on giving it to our kids one day?
Homes are definitely pricey these days, but the tide in the real-estate market is turning back to the buyer, so you may be in better shape than you think. Of course, there are still plenty of variables to consider, as you know.
It’s now a “buyer’s market” in real estate, said William Parrott, a certified financial planner and chief executive officer at Parrott Wealth Management.
Home prices are beginning to fall in various markets across the country because of rising mortgage interest rates, at least for now. But as we’ve seen in just the last few years, things can change quickly. “If inflation has peaked and interest rates start dropping, the real-estate market could heat up again,” Parrott said.
You are at quite the advantage right now. You’re still working, so you’re bringing in income during this wild economic environment with rising inflation and interest rates and market volatility the past year. Plus, you have rental income. There is a healthy nest egg stashed away for retirement, which doesn’t include the money made from the recent sale of your main residence. And you seem very focused on getting the numbers right.
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If you’re really not sure if renting or buying is the best decision for you and your spouse right now, don’t jump into anything. Buying a home just to turn around and sell it shortly after can be an expensive blunder, and it’s not like there’s a rental lease expiring in the next month or two. If you haven’t already, start looking at properties for purchase and rent where you intend to move in California, and try to track the progress. How much have homes sold for in the last couple of years? What’s the rate of inflation in the rental market there, and what do analysts expect it to be in the coming year or two?
If you were to buy a home with a higher interest rate, and if you were to take on any mortgage, you could always refinance later on if it makes financial sense. “They can always go adjustable for a couple years and refinance later,” said Linda Farinola, a certified financial planner and president of Princeton Financial Group. “If it is the right property for them, they will stay there for a while and the price will work itself out over time.” Just watch with adjustable rates — they can be risky since there are a lot of uncertainties, such as if the rate will spike before you’re ready (or even can) refinance.
Refinancing can save homeowners thousands of dollars, but it doesn’t make sense for everyone, as there are fees and other factors to consider (duration of mortgage, if you’ll be selling the house before paying it off, and so on). If you can reduce your interest rate by three-quarters of a percentage point, or shorten your loan term, refinancing may be worth it, Nerdwallet’s Holden Lewis told MarketWatch Picks.
Also see: I’m 67 and retired with $57,000 left on my mortgage and $600,000 saved for retirement – should I pay off my home now?
If you decide renting is the best choice, it’s not like you’re locked in forever. You might even want to rent temporarily, just to make sure that location is the right place for you to be (taking into account the cost of living, temperature, proximity to entertainment and important medical facilities, etc.) and then end up buying something when it pops up on the market. In your current situation, “flexibility (renting) trumps owning,” said Thomas Scanlon, a certified financial planner at Raymond James Financial Services.
If you can, add the extra challenge of picking a smaller place to rent and get rid of stuff you don’t actually need or use, Scanlon added. He also mentioned getting a good renter insurance policy if you were to go this route.
Above all, think about what either choice would mean for you and your family. You can pore over the numbers a million times, but if the choice ultimately isn’t right for your family, you may not be happy – even if you’re saving a ton of money.
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