Dear Penny: I Want to Buy a Small Retirement Home. Should I Use My Savings?
I live in the Philadelphia suburbs. I recently retired as an orchestra teacher in the public school system. I will be on Medicare in December.
I sold my large home and live in a modest apartment for $1,300 per month rent. So I'm comfortable financially and easily making ends meet.
HOWEVER, I really want to buy a small home. The real estate market is off the charts right now and prices are insane. I would also use most of my savings and have a mortgage. My payments would be about the same.
I have $200,000 in an IRA invested in stocks and bonds, $14,000 in a Roth IRA that I just opened last year and $80,000 in savings. I am debt-free and own a brand-new car.
I am collecting a monthly pension of $3,000 and $2,000 in Social Security after taxes and Medicare supplemental payments. My pension plan is a defined-benefit plan with a $900,000 death benefit.
Can you offer any advice as to whether or not I should buy a home?
You can clearly afford to buy a home.
Normally I’d start the finger-wagging if you told me you wanted to spend most of your savings for a home purchase.
If you were still working, I’d ask you what would happen if you lost your job. And if you were a retiree who depended mostly on investment income, I’d warn you that a stock market crash could temporarily wipe out much of your nest egg.
But you have no debt and $5,000 of monthly after-tax income that’s guaranteed for life. Your income isn’t contingent on a salary or the stock market’s performance. So you can afford to spend a lot of your savings to buy a home.
Plus interest rates are historically low. That’s good for homebuyers, but not so good if you have $80,000 sitting in a savings account, where it’s probably earning 1% at best. It makes sense to put some of that money into an asset that history tells us will probably appreciate over time.
But I think you know you can afford to purchase a home — even if you pay a slightly inflated price.
So think about why you want to buy a home: Is this an investment to you? Or do you want to buy a place to make your own for many long and happy retirement years?
I’m not saying you have to choose one or the other. In fact, I wouldn’t suggest buying a home unless you think it will be both a good investment and a good place to live.
But defining your goals will help you make the right decision. If you’re buying a home as an investment, you’d want to consider how you could maximize your ROI. In that case, of course, you wouldn’t want to buy at the top of the market.
But if you’re buying a home to live in that’s well within your budget, it’s OK to buy even though the market seems sky high. Sure, it would still be nice to score a bargain price, but it’s less important when your home purchase isn’t primarily an investment.
Which brings me to the second question you need to ask yourself: What’s the worst thing that could happen here?
If it’s purely an investment decision, the doomsday scenario is that you buy a house, the market crashes and you’re left stuck with a house you can’t sell.
Mind you, the housing market has remained strong even in the year of coronavirus. It’s highly unlikely that we’ll have a repeat of the 2008 housing crash. But we’re talking about the worst possible outcome here, so please bear with me.
If you approach this as buying a place to live? Suppose the market crashes and your home loses value. By buying at the market’s peak, maybe you’d miss out on the chance to buy more house for less. (Of course, there’s the flip chance that the market keeps soaring and that this year’s prices will look like a bargain a year or two from now.)
Regardless, you’ll be paying $1,300 a month for housing whether you rent or buy. You might as well use that to build equity — and since it sounds like you’ll make a substantial down payment, it doesn’t sound like you’d need to worry about being underwater, even if home values fell.
I think the biggest challenge you’ll face is sticking with your $1,300 a month budget. If that’s the amount you’re comfortable with, stand firm, even if that means buying an even smaller home than you’d planned to.
The beauty of your situation is that you can afford to not make this a numbers game. If a home will help you enjoy your hard-earned retirement even more, let the house hunting begin.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].
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