Journal of Financial Planning: November 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.
Editor’s Note: Read Part One in the August 2021 issue of Journal of Financial Planning.
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In May 2021, Capital Caring Health surveyed a group of adults over age 50 across all races, income, and health status categories. Ninety percent of respondents wanted to age in place. A 2018 study conducted for AARP by NORC at the University of Chicago indicated 77 percent of this same age group wanted to remain in their own communities for as long as possible. However, just 59 percent of those surveyed thought they would be able to do so.
While these studies indicate that the majority of retirees don’t want to move, others do or at least buy another residence. COVID-19 has altered how people think about where they want to live. During the past two years, many have moved away from the city to the suburbs or the country in order to have more room. Once they have made the transition, some decide that they prefer this life. Even for those who continue to work, the pandemic has demonstrated that much remote work can be done efficiently so proximity to work is no longer as important.
Regardless of whether a woman is working or not, we’ve observed that our female clients have an emotional tie to the home in which they live; it’s part of their identity. The location of their home is also important, being close to friends and family. As advisers, we need to be sensitive to the fact that selling the house is more than a financial decision.
Motivation to Move
There are many reasons people choose to move to another area when they retire. They might prefer a better climate (warmer or cooler), one with lower living costs (including taxes), access to quality healthcare, being nearer to family members and friends, or some combination of these factors.
This is why we advise our clients who are considering a change to rent before they buy, particularly if they’re considering a drastic change of environment. A place they might have visited in season may not be as desirable year-round (consider Florida or Arizona in the summer). When looking at taxes, it’s important to calculate all taxes. Having low or no state income taxes is attractive, but these savings might be offset by higher real estate and sales taxes. Kiplinger’s State-by-State Guide to Taxes on Retirees is an excellent resource for this information.
We warn clients not to choose a location solely based on their desire to be near children or grandchildren. We have seen too many cases where someone (particularly a widowed grandmother) moves to be near her family only to find leaving old friends and religious ties does not work out. In other cases, she leaves her familiar environment, only to see her family move elsewhere due to job changes!
Second Homes
For those retirees who don’t want to move from their primary residence, some decide to rent or buy a second home in another area. A common choice for those who live in a colder climate is to have a second home in a warmer climate to avoid the ice and snow of the winter. Or those who live in the south may seek a summer place in a cooler climate.
In this regard, it’s good to recognize that these choices usually aren’t permanent. We have noticed that while having two homes may work for the early years of retirement, as retirees age, they choose to simplify their lives and go back to a single residence—whether a single-family residence or a retirement community. In some cases, the second home becomes the primary one.
Recreational Vehicles (RVs)
COVID-19 had another effect on many people. To control their environment when traveling, they rented or bought a recreational vehicle. This is particularly appealing to new retirees who want to travel and have the comfort of their own home. Some choose to use the RV as a second home. They may park the RV in a motor park for a season or move around the county visiting various RV parks. Here again, we recommend renting before buying an RV as it can be a major investment. Also, it’s important to recognize that eventually this nomad existence may lose its attraction or practicality. Driving a large vehicle can become too physically demanding!
Retiring Outside the United States
According to a 2018 study by Aegon Center for Longevity & Retirement, 12 percent of retirees have considered retiring outside the United States. There are several places where living costs are considerably less than in the United States. Your client might choose to do this particularly in the early stages of retirement. One of our retired couples bought a home in Italy in a remote village where they were the only Americans. Initially they loved it, but after a few years, health issues and taxes for foreign residents prompted them to move back to California. It took them three years to sell the house. Therefore, as with all other options, it’s important to help your clients do their research before they make radical changes.
Other Considerations
Selling to rent. At some stage of retirement, your client might consider selling her home and renting. This way she would free up the equity in her home. She could invest the money elsewhere or use the proceeds to support her lifestyle. Not having to worry about maintaining a home, particularly a single-family home, can be very appealing. Trulia offers a calculator that compares the economic choice of renting versus buying.1
Costs of moving. If your client decides to move, help them calculate the associated costs. They need to include real estate agent fees, improvements needed to sell the home, moving costs, new home improvements, and tax implications of the sale. When selecting a moving company, make sure the movers visit the client’s home to make a written estimate. Ideally, your client should get three estimates before making a decision. Rates vary according to the month and year that they move. The Federal Motor Carrier Safety Administration has advice and resources about how to find a registered mover and protect against fraud.2
Selling process. During the past few years, I have sold three residences in different locations. Based on these experiences and those of my clients, I would strongly recommend your client use a real estate agent rather than trying to sell a home herself. This professional should have experience selling homes in her neighborhood and represent your client’s best interests. Just as financial planners are paid for their expertise, the same is true for a good real estate professional.
In our case, the agent recommended I use a home staging professional to prepare our homes for sale. The object of this advice is to create a neutral environment so that the buyer can visualize themself in your client’s home. Here again, your client may be very attached to the decor she has created and lived with happily for many years. However, even if she doesn’t agree with the advice (and I didn’t), encourage her to let go her personal preferences and follow the stagers’ advice. I have had clients who resisted the advice, and the sale took longer.
Downsizing belongings. I have found that one of the major objections clients have to moving is they are overwhelmed by how to dispose of all the stuff they have accumulated over the years. Intellectually, they know they need to downsize, but emotionally, they find it difficult to let go. If your client is having trouble moving forward, there are professionals such as the National Association of Senior & Specialty Move Managers3 who will help your clients sort through their possessions and figure out what to keep, to give away, or to sell.
Your clients will quickly discover that their children have little or no interest in taking any of their precious belongings. The same is true in realizing any significant money from selling most items. Assuming your clients are in the higher tax brackets, donating items to charity is often the best route. If they choose to do this, I recommend they make a list and take pictures of everything they are donating and assign realistic (low) values to them. The charities will provide a signed receipt, but will not value the donations, so it’s up to the donor to defend their value. The Salvation Army website has a “Donation Value Guide,” which will help your clients price their donations realistically.
If all else fails, suggest your clients rent a storage unit for all the items they don’t have time to sort through. Later, they can go through these at their leisure. It has been our experience that anything that goes into the storage unit usually ends up being donated or thrown away later, but at least it gets the stuff out of the house!
Timing. For retirees, changes in residences usually come in stages. They may start out wanting to age in place, but as they get older and health issues become more significant, they may decide to move to a more manageable residence or a retirement community. If they are thinking about a retirement community, the question is when and where? Some choose to do it sooner than later. Others wait, but I would urge you to point out to your clients that if they wait too long to move, health issues may prevent their admission. The majority of our clients tell us once they have made the move that they regret not having done it sooner!
Conclusion
Where your clients choose to live during their retirement years is both a financial and an emotional decision. Be sure to tell your clients that this is a time of change—there may be some false starts. What they envisioned as a happy retirement environment may turn out to be otherwise. Many people will be retired 30 years, so there is plenty of time for them to change their minds. It’s my belief that it’s during this period of our clients’ lives that the advice we planners give is particularly valuable. Based on our experiences working with other clients going through similar decisions, we can guide our clients to make wise choices. After all, isn’t that everyone’s ultimate retirement goal—making sure that their retirement years are truly their golden years?
Endnotes
