Journal of Financial Planning: August 2021
Alexandra Armstrong, CFP®, CRPC, was one of the first female CFP® practitioners in the U.S. as well as the first female president of the IAFP (precursor to the FPA). She founded her financial planning firm in 1983 in Washington, D.C. Since then, she has focused on helping women achieve financial independence. She is the coauthor of Your Next Chapter: A Woman’s Guide To A Successful Retirement.
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Last year, COVID-19 forced us all to experience what living at home when retired might be like. Items that were easily ignored when you weren’t home that much no longer were. No wonder home improvement, and furniture and appliance sales, have gone through the roof! Many homeowners were motivated to move to larger homes in the suburbs or to more remote vacation locations. One wonders if this trend is a permanent or a transitory one. In any case, we all have a better idea of what life in retirement might be like when we will be spending more time at home.
We are well aware when working with clients that housing is one of the major expenses everyone has before and after retirement. Helping your clients decide where they want to live is often complicated because it is more than a financial decision. It’s also a physical and psychological issue. Where a person lives creates a sense of belonging and value, particularly for women. Your clients’ physical environment has a lot to do with their staying healthy and independent. It’s important that their living situation fit their current level of physical and mental ability. At the same time, they should look ahead to their anticipated future needs.
Increasingly, advising retirees as to appropriate housing involves not only their retirement but also that of their parents as they age. Your clients may be asked to help their parents financially and/or physically, or to make decisions about where they will live. It is often the daughter or daughter-in-law who is called upon to help parents.
Stay in Current Home
Most people want to stay in their current home, particularly when they first retire. They might be attached emotionally to the place where they know their neighbors and their environment. However, as time goes by, other factors may motivate a person to move due to changes in the neighborhood, a sense of isolation, or physical health issues.
One of the major issues clients need to consider as they plan for retirement is the cost of continuing to live in their current location. In addition to the obvious costs of the mortgage, real estate taxes, and condo or association fees, there are maintenance costs, which clients forget to include in their budgets. A rule of thumb is annual costs run about 1 percent of the value of the home, but this will increase with the age of the house.
Pay Off the Mortgage
One of the most common questions asked by clients who are about to retire is whether they should pay off their mortgage. They are looking at their home as a major budget item. As planners know, the answer to this question is both financial and psychological. Given current low interest rates, most people have refinanced their home and are paying historically low rates. Depending on their tax situation, the mortgage interest may be one of the few tax deductions they still have. As planners, we will point out that by maintaining the mortgage, they have more principal available to invest or to pay other expenses. However, as I am sure you have experienced with your clients, we have to recognize that many people (dare I say, women) are emotionally wed to the idea that their home is paid in full, and they owe no debt. In these cases, after presenting the reasons not to pay off the mortgage, I have found that for some clients, paying the mortgage off may be worth the peace of mind it provides.
Modifying the Home
If your clients decide to stay in their home, we recommend that they make modifications for the aging process, ideally before they are forced to do so. Useful changes that can be made include sturdy grab bars in the bathroom, higher toilets, shower seats, slip-resistant bathroom floors, brighter lighting, and lever-style door and faucet handles. You might convert existing living space on the ground floor to accommodate a bedroom and full bath. Although clients may not need to make these changes for themselves right now, visiting parents might appreciate them.
For specifics, provide your clients with the “aging-in-place” checklist from the National Association of Home Builders.1 This site also includes a directory of contractors who are Certified Aging-in-Place Specialists (CAPS). They can come to your home and make recommendations for changes. Another resource is the HomeFit Guide from AARP.2
Aging in Place
For people who want to age in place and can afford to do so, there is the “village” movement, which is gaining popularity in major cities around the country. A “village” is a community organized by a group of people who want to continue to live in their home as they get older, with all the resources needed to live active lives.3 The members pay an annual fee to belong to these organizations. In return, volunteers will provide members with the services they need to stay in their homes. These might include courtesy rides to a medical appointment, help with a shopping trip, and minor home maintenance. They also offer social activities for members, which combats social isolation that can affect those living alone.
Home Sharing
For someone living alone, which often is a woman, sharing her home with another person on a temporary or permanent basis might be a good idea. The motivation might be safety, companionship, additional income, or the ability to stay in her home longer. She might rent a bedroom and bathroom to someone in exchange for rent or help with transportation or household chores. This person may be the same age or younger, such as a student.
Another way to add to a retiree’s income would be to rent out living space on an occasional basis (think Airbnb). In some cases, we have seen a group of friends buy a house together and share expenses and household duties (obviously, you had better be good friends who know each other well!).
If the idea of house sharing appeals to your clients, they should consult an eldercare professional, friends, or a family member to help screen candidates. It’s important to make sure the tenant qualifies personally and financially. A background check, a damage deposit, and a written lease agreement are advisable.4
Moving in the Same Geographic Area
Despite the trend during COVID-19 to move to larger residences, most people who retire tend to downsize or, as some people call it, “rightsize” to smaller spaces, often on one floor (or with an elevator). As for timing, we suggest clients allow enough time to make this move—typically 12 to 18 months. If the clients can avoid it, we suggest they do not make the move when they first retire since they are making so many other decisions. Too much change at the same time can lead to unwise actions.
Typically, the clients will phase in downsizing, first moving from a large house to a smaller house or apartment. This might be part of a multi-age community or part of a retirement community. Having someone else take care of repairs and collecting mail can be quite liberating. Rather than moving out of town, your client may want to be closer to restaurants, entertainment, food stores, and cultural pursuits. Also, as part of the aging process, being closer to doctors and medical care becomes more important and, in fact, essential.
Eventually, clients may choose to move to a retirement community. As you probably know, Continuing Care Retirement Communities (CCRC) offer a tiered approach to the aging process, accommodating residents’ needs as they age. Health services, meals, personal care, housekeeping, transportation, and emergency help, as well as social activities, are included. In some cases, the client might have her own cottage; in others, she might be in an apartment.
There are different CCRC contracts, but typically, the client is making an agreement with the CCRC to provide service and a place to live for the rest of her life. The client pays an entrance fee (which may be partially refundable to her heirs) as well as a monthly fee. Part or both of these fees may be tax deductible. In other cases, the client buys the apartment, which can be sold by her heirs, at either a predetermined price or current market price.
As our client base has aged, we have visited CCRCs in our area and met with a member of their marketing team to get more information. Each community has its own pros and cons. Of course, you want to make sure the community is financially sound. We ask how their occupancy rates have changed over the past few years (ideally, you want that to be a rate of 90 percent or more). You want to see their audited financial statements as well as a recent actuarial study. How much have their annual costs risen over the past five years? The best approach of all is if you know someone who has been living in the community for a few years to give you additional insight.
Moving to a CCRC can be expensive, but is appealing to many, particularly if the client doesn’t want to rely on their family and wants to stay independent as long as possible. We can’t tell you how many of our clients have resisted moving from their home to a retirement community who, once they move, tell us, “We wish we had done it sooner.” This is particularly true of single women!
In my next article, I will explore other aspects of retirement housing including moving out of the clients’ geographic area or buying a second home.
Endnotes
- See “Aging-In-Place Remodeling Checklist.” Available at www.nahb.org/education-and-events/education/designations/Certified-Aging-in-Place-Specialist-CAPS/Additional-Resources/Aging-In-Place-Remodeling-Checklist.
- See “AARP HomeFit Guide.” Available at www.aarp.org/livable-communities/housing/info-2020/homefit-guide.html.
- See www.vtvnetwork.org.
- See www.nationalsharedhousing.org.
