Finding (and Funding) Your Home in Retirement

Retirement is a time of transition. Those approaching retirement often look forward to the freedom that they’ll enjoy once they stop working. That flexibility not only allows them to dictate how they spend their time, but where they spend it as well.

We have many conversations with clients about where they would like to spend their retirement years, as well as how they may be able to fund that relocation once regular employment income stops.

Considerations for finding a home when you retire

There are some qualitative factors to consider when looking for your home in retirement.

1. Lifestyle

As a (not-so-good) golfer and a fan of the beach, I can see myself spending many months of retirement down south. Others who prefer hiking or more scenic landscapes may choose to go out west. We have even seen clients move overseas. You spend your entire career working and saving so that you can enjoy retirement, so why not follow your passions? One thing that I often encourage clients to do is to rent in a new location for a year or two before buying. Sometimes, clients pinpoint an area where they have stayed on vacation and decide it is where they’d like to retire. However, vacationing somewhere a couple of weeks per year is much different than living there. Your goals are to relax, enjoy yourself and not worry about the challenges of everyday life. Renting for an extended period will allow you to face the difficulties of your new location and can help you determine if that is truly where you’d like to settle long-term.

2. Taxes

As a firm based in New Jersey, we are all too familiar with people fleeing the tri-state area for tax reasons. The most common thought process we encounter is that people move to a state with no state income tax, such as Florida. There are a couple of other tax considerations. One, property taxes. For instance, Texas has no state income tax, but has among the highest property tax rates in the country.¹ Florida falls in the middle of the pack. You also may want to consider the estate tax laws in that particular state.

3. Family and friends

Although people enjoy associating retirement with warm weather and low taxes, it’s hard to overlook the fact that proximity to family and friends can be important when deciding where to live. Grandparents may want to play an active role in their grandchildren’s lives, which is hard to do if they are on opposite sides of the country. This is one reason why retirees might consider two homes: downsizing in their pre-retirement location and purchasing in their desired retirement location. That way, they can enjoy retirement living in their preferred environment, while still spending quality time with family.

Potential funding options

Now that you have found a home for your retirement years, how might you be able to fund it? Income (aside from pension-related assets) has likely stopped or been significantly reduced, so how can you qualify for a mortgage? You may now be relying largely on your portfolio to fund your living expenses, so does selling assets and buying a home using cash make sense?

1. Temporary distributions

One obstacle that retirees may face is qualifying for a mortgage. Lenders often like to see a steady stream of income during the underwriting process. One possible strategy is to begin taking temporary portfolio distributions to show income. Once the mortgage is approved, you could turn off those distributions to maximize the assets that are invested in your portfolio.

2. Borrow against existing assets

It might make sense to borrow against your existing assets if a traditional mortgage is unobtainable. Pledged asset lines and margin loans allow you to borrow against portfolio assets, while home equity lines of credit (HELOC) or cash out refinancing may allow you to borrow against your existing home (if it’s not being sold). The underwriting standards will differ for all these strategies, as may the time it takes to get them in place.

3. Buy with cash

If you plan to sell your existing home and the timing of the transactions works out, you could consider a cash purchase using the home sale proceeds. Provided that interest rates are relatively low at the time, it may make sense to use the cash to fund your down payment, take out a mortgage and invest the excess cash. However, we understand that not everyone is comfortable with taking on a mortgage in retirement. This scenario could make sense for those who are debt averse and simply want to own their home outright.

Buying a home is a big decision at any point in a person’s life. Layering retirement on top of that can make it more intimidating and complex. If you’re considering buying a home in retirement, please reach out to your Wealth Advisor to determine the best approach.

¹ https://www.forbes.com/sites/briandomitrovic/2023/03/25/texas-is-on-the-cusp-of-trouble/?sh=6158e5c6d51b

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