For clients in or near retirement, real estate conditions have made it tempting to cash in on longtime homes and make the leap to a new address for a new stage of life.
Whether clients want to downsize, upsize or even take their home on the road for a while, planning – earlier rather than later – is the key to making that happen.
“Everyone faces housing decisions during retirement and the answers to these questions depend on our values around where we want to live and how we want to live,” says Michael K. Babcock, chief executive officer of Azure Sky Financial Life Planning in Burleson, Texas.
“Cost can certainly be a factor, but it makes sense to start with what is most important to us,” he says.
Babcock is a CFP and has his RLP (registered life planner) designation from the Kinder Institute of Life Planning. That background is integral to his view of working with clients.
He has noticed a growing trend among clients choosing to plan for their downsized – or upsized – retirement home while they are still employed.
“The kids are often out of the home,” he said, and clients have time to “focus on their vision for the future.”
Their planning can often start three to 10 years before actual retirement. And that should be about “right-sizing,” he says.
Babcock was among four financial advisors who shared their perspectives with Rethinking65 on current real estate market conditions, the impact of the Covid-19 pandemic and the personal factors that go into making a move in retirement.
Financial planners need to have that all-important conversation with their clients to determine what it is about moving that is important to them, Babcock says.
“Their money is just a tool to help them get there.”
Babcock had one client who didn’t want to sell his home at all. Instead, the client opted to buy a $100,000 motor home and dubbed it his “flush toilet on wheels.”
The client spent down some of his portfolio on that expense, but the return was priceless: He enjoyed two years or so visiting his grandchildren. He could set up home near them, having enough time to enjoy the children. Then he was able “to move on to the next set of grandkids,” Babcock said.
The client accomplished something meaningful to his vision of life before he parted ways with the motor home to buy a second home right in the neighborhood of his and his wife’s elderly parents.
His client’s life goal this time? Just to be there for the older generation of his family, Babcock says. The client spends several months a year in that smaller home and still has his home in Dallas.
Managing Liquidity and Taxes
In New York City, Patrick Fruzzetti is managing director of Rose Advisors, a Hightower Company. Rose Advisors serves clients across the country.
The pandemic continues to change the real estate landscape in the city, Fruzzetti says. His clients run the gamut from those who own properties in the city and suburbs to landlords of rental properties, who faced particular challenges.
“There were drastic shifts in a short period of time. We do a lot of wealth planning and if you lived in or owned rental properties it all changed with Covid,” he says.
Rents went through re-negotiations, for example, and landlords often had new tenants.
‘We have clients who have rentals here in New York City and have been (and continue to be) deeply impacted,” Fruzzetti says. His firm helped clients manage their liquidity and wait out the rental downturn, he adds.
Advising clients about their real estate holdings has become key in a period of surging prices, he says: “Like any portfolio, if real estate as a percentage of overall allocation becomes too large, we will often walk through scenarios of a prospective sale. Even for multi-family real estate across the U.S., cap rates have come in very sharply as competition (and uber-low interest rates) have driven the price fluctuation.”
He said many of his New York clients own other properties and the pandemic accelerated their move to Florida or Arizona, for example. “In many cases, tax residency played a part in the decision,” he said.
“A second home is tremendous,” Fruzzetti says. For example, one of his city clients moved permanently to their upstate New York property, enjoying the new lifestyle, picturesque surroundings — and more favorable taxes.
In guiding clients through their retirement real estate choices, Fruzzetti says clients who take positive steps while still working can reap the most reward.
“During their working years, people tend to say ‘I’ll do this once I retire.’ I say, ‘If you like it, buy it now while you still have a job. It’s an investment for your future.’”
Based in Buford, Georgia, CFP Chris Hardy, founder of Paramount Investment Advisors/Paramount Tax and Accounting LLC, says the state is finding new fans in this time of pandemic and rising real estate prices.
In some ways, Georgia is a “half-back” state, he says — that is, people traveling to Florida may stop in Georgia halfway on the trip and realize, “hey, this isn’t a bad place to live.”
An advantage in Georgia for homeowners over 65 is that they often pay low taxes. Each county governs property taxes, and many of them either reduce or eliminate the school portion of the property tax for those who are at retirement age. Also, full-time residents 65 and over are entitled to a retirement income-tax exclusion of $65,000 per person, a total of $130,000 annually for a couple. The exclusion is primarily on investment income, but can include $4,000 in earned income. Georgia offers a reduced retirement exclusion for people between 62-64 and a prorated exclusion for part-time and nonresidents.
As with many urban/suburban areas around the country, Georgia continues to have a hot property market due to high demand. Hardy says he’s been told that the state has only a two-week inventory of houses, with properties often under contract sight unseen.
So these conditions present property owners — and their financial advisors — with the need to make well-considered decisions when it comes to downsizing or upsizing, as the case may be.
For example, many clients may own a vacation home and usually face two different scenarios, he says. The vacation home may be smaller than and not as comfortable as the owners are accustomed to in their primary residence. But downsizing to a smaller second home provides a degree of financial comfort that’s hard to match.
“If your vacation home is your forever home, you can cash out now on your larger home,” he says.
And when a vacation home isn’t quite a client’s dream home, he says, some have opted to “deal with it for a couple of years” and ride out a superheated housing market when their options to buy or build may improve.
Hardy says while residents account for most relocations in Georgia, a handful of his clients are new to the state. “They find they can get a lot bigger house here.”
He has one client who “got a great deal” on his large home in California and was easily able to buy two houses when he moved to Georgia — one of which is a cabin in the mountains at the origins of the Appalachian Trail in the northern part of the state.
But for most clients, the Atlanta area is their go-to. Hardy says Atlanta proper has 400,000 residents, but the 13 counties surrounding it create a population center of seven million people.
And downsizing to active adult communities with comfortably sized homes but smaller properties is an attractive option — not only financially but also socially.
Hardy’s clients often find a new sense of community in active adult developments, he said.
“It’s a revival of their early years of meeting young friends and neighbors,” he adds. Cozier property sizes mean residents can go for a walk and find others equally new to the community. He’s been told his clients will interact more, often having a drink with neighbors on the porch or going out with them to dinner.
And clients enjoy the services at the communities — landscaping, outside repairs and amenities are someone else’s problem now. But he advises clients to be mindful that they may just be swapping private home expenses for an association fee — and at times their expenses may actually increase.
Retirees who opt to purchase in 55-plus communities rather than in private homes “is a good mix — maybe half or 60/40,” he says. But one client moved from Ohio to a private house in a charming Georgia town where she can walk to restaurants and shops — another goal for many retirees.
But not every client in post-working years is on the move, Hardy notes. He has clients who opt to stay put in their primary homes.
And if someone feels “stuck” in their house, he advises them to consider the option of a home equity conversion mortgage (HECM).
“People may be sitting on a $300,000 asset with no ROI,” he says. So there are highly regulated Federal Housing Administration (FHA) products that allow a retiree to extract income from their home with no need to make monthly repayments.
This form of a line of credit is a “backstop,” Hardy said. A homeowner can apply for it, obtain it and “just put it in a safety deposit box” if they don’t need to use it. If they do, it’s there and can be repaid with the sale of the home.
Advisors not only have to consider location and finances when working with clients, but also the practicalities of making such an important move.
Lauren Gadkowski Lindsay, CFP with Beacon Financial Planning, is based in Houston where the housing market is “on fire and has been for a while,” she says.
“There are no zoning laws, for better or worse, so anything goes. In my neighborhood we are seeing older homes torn down and multiple units put up or very large homes. I wouldn’t say Houston is a retirement mecca the way some less urban parts of Texas have become. For clients looking to downsize, this means they may get top dollar for the houses they are selling but also will need to pay for their next home,” she says.
The high property values also explain why there are so many more storage unit rental sites popping up in the area.
“A phenomenon I observed in Oregon is trailer parks along the Oregon coast full of retirees. These are people who downsized to live in RVs and are in some of the most beautiful and scenic areas as they wish to be. Then they can pull up and live somewhere else for a few months or visit children,” she explains.
Lindsay presents real-life considerations to clients: Is this the house you plan to retire in? At what point do you think you will need to move out? Can you afford the upkeep? How will you deal with your “stuff” in a move? Or can you part with your heirlooms to family and others while you’re still alive?
If clients are considering a second home in an unfamiliar area, she suggests they rent a house for a month or so before taking any drastic steps.
And if remaining in the home is where the client feels most comfortable, Lindsay has done reverse mortgages with clients when appropriate — when it made sense and the house didn’t need to be “left” to anyone, she says.
“It is quite a process and not for everyone, but it can be a good way to tap home equity as needed. It’s important to find a lender who can really walk you through the pros and cons, but it is much safer to do than it used to be,” she adds.
Herself the daughter of a financial planner mother, Lindsay does not shy away from serious questions: “I also talk about long-term care plans, even the layout of the house — are the doorways wide enough? Are you willing to care for the other person there?” she says.
And Lindsay urges clients not to wait too long to downsize.
Above all, she says, she wants her clients to avoid having decisions about their downsizing left to others after some sort of health event.
Clients come back to her and say they are happy they were proactive.
“People are so grateful,” she says of clients who made their own best choices.
Patricia McDaniel is a freelance writer and editor and former journalist with Gannett’s New Jersey newspapers. She can be reached at firstname.lastname@example.org.