Having your affairs in order to prepare for retirement isn’t as cut-and-dried as a simple dollar amount. There’s also the consideration of what you want an affordable retirement to look like and what you’ll be doing on a day-to-day basis.
With housing alone, there are numerous ways that retirement can vary from person to person. Some people would prefer to stay in their family home as long as possible. Others ditch a house altogether and wander around the country in a motorhome or jet-set around the world having adventures.
Whatever your ideal retirement living arrangement looks like in your head, you’ll want to familiarize yourself with some options. After that, you’ll want to make plans to ensure that your finances give you the ability to provide you with the retirement you want.
Here are a few options and considerations to consider as you plan your affordable retirement housing.
1. Rent your house from your children.
This might seem like a strange thing to do. After all, what if you own your home outright? Why would you want to pay rent when you don’t have to? But, surprisingly, there are several reasons why retirees might do precisely that. Here are just a few of those reasons.
Equity Cash Out
Maybe you’d like to invest a large sum of money into an income-generating venture to support your affordable retirement. Alternatively, you might decide it’s time to finally take the dream vacation you’ve been putting off for decades. If you have an immediate usage for a large chunk of cash, that equity in your home might be a viable source.
From reverse mortgages to other methods, there are numerous ways to get cash from your home. However, selling your home to one of your children and paying rent will still get that lump sum and provide a stable living arrangement.
Another benefit of renting from a family member is that the monthly rate has a little more flexibility. Theoretically, the IRS could subject the difference to gift tax if you are charged less than the fair market rate for your rent. However, the IRS specifically allows a 20% discount for rent from family members. So while you won’t get away with paying $15 a month, going from $2,000 to $1,600 a month is significant.
Fewer Inheritance Complications
Stipulations involving where your assets go after your death are tricky. They can be complicated. Sometimes they even cause family conflict. Depending on your family dynamics, selling your home to one of your children prior to death can alleviate some of that stress. The home will already be in someone else’s name and, therefore, not be a consideration in the distribution of assets.
If additional equity is still left in the bank upon your passing, that can be distributed to your heirs or elsewhere as desired. Typically, cash is far easier to distribute upon death than assets.
Benefit Your Family
Selling your home can be advantageous to your children as well. If you sell to one of your children and pay rent, deductions on the home are applicable since it’s now a rental. In addition, you can claim mortgage interest, depreciation, and other tax benefits on your child’s tax returns.
Buying your home as a rental might be how your children take the plunge into real estate ownership. First-time homebuyers might want to start building equity but find the current interest rates to be an obstacle. According to Mortgage Research Center, mortgage news consistently shows rising interest rates. Buyers should pay attention to news sites like this to get up-to-date predictions on the mortgage economy.
Since fewer people itemize their taxes, it’s unlikely that you can deduct mortgage interest on a personal return. However, if the interest payments were tax deductible as a rental, perhaps they wouldn’t be such a heavy deterrent.
It’s also great for your children to dip their toes into the rental game. They can get experience with the business and tax side of the venture without dealing with unruly tenants or background checks. In addition, they might be more confident in buying other properties in the future once they get accustomed to the basic process.
2. Downsize
When children are growing up, an affordable retirement seems a long way off. Many families might feel like there’s not nearly enough room in their houses. Bedrooms are being slept in, friends are coming over regularly for gatherings, and toys are probably everywhere. Wall art might need to be arranged to cover crayon “masterpieces,” but at least there are several years when teenagers can mow the lawn.
But things can seem very different after all the kids have grown up and left the family home. Those tight quarters with people bumping into each other during mealtime? Now there’s plenty of room, and the house might feel downright cavernous. It’s very possible to have more than one room that you don’t use for days or weeks at a time.
On top of unnecessary space, it might become increasingly difficult to keep on top of home maintenance and cleaning as you age. For example, maybe you spend a great deal of time and annoyance mowing a lawn that nobody uses or plays in. Or perhaps ongoing injuries or health issues make it inadvisable to clean out the gutters regularly. Sure, you can plan on hiring out these tasks as you advance in years, but that can quickly become expensive.
Time to Let Go of Nonessentials
To leave these headaches and expenses behind, some individuals or couples choose to downsize their homes for an affordable retirement. Some not only enjoy the lower maintenance but also find affordable retirement communities to increase their social interaction. Whatever the reason, downsizing is an appealing option for many retirees. And depending on the housing economy, your health, and your finances, there are multiple options for the transition.
If family homes are in high demand, it might be smart to just go ahead and sell your house and use the proceeds to buy a smaller home or condo. However, assuming there is an abundance of family homes on the market, you might choose to rent your home instead. If you cannot afford to buy your downsized home out of pocket, rental income will hopefully more than cover any mortgage payments. And depending on how adverse you are to rental management, you can offload those responsibilities to a third party.
3. Plan Ahead for Long-Term Care Costs
Declining health is a situation that’s unpleasant to plan for. Most people look forward to retirement and travel opportunities or spending more time with loved ones. However, acknowledging the potential need for long-term care of some sort tends to take the joy out of affordable retirement planning. Because of that, some people delay taking action to prepare for that scenario. Unfortunately, you may have limited options for your living arrangements if you wait too long.
Before determining your plan of action for funding long-term care, you should carefully consider your preferences. For example, do you want to stay in your home as long as possible? Are you planning on downsizing at some point and might consider an assisted living community?
Each housing situation will have different needs and considerations for care assistance. Likewise, additional funding sources for long-term care have different coverage. So as you’re planning for your retirement, make sure you’re on course to have plenty of care funds available. Here are a few of the most common long-term care funding options and how they work.
Health Savings Accounts
HSAs are extremely versatile. You can use them for anything from OTC drugs to nursing homes to in-home care payments. One of the appealing things about HSAs is that they are untaxed as long as payouts are used for health-related expenses. As the average cost of healthcare throughout a couple’s retirement is estimated at around $315,000, it’s likely those funds will be used.
Another great thing about HSAs is that they both roll over from year to year. You can invest in them for growth. So if you plan on using HSA funds to cover long-term healthcare expenses in retirement, begin contributing as early as possible. You can contribute as long as you have coverage through high-deductible health insurance.
Making Provision for Healthcare
There are a few downsides to HSAs. Annual contribution limits are relatively low. In 2023, the maximum allowable contribution is $3,850 for individuals and $7,750 for families. If you max out your contributions from a fairly young age, that can add up substantially over time. If you start late or are ineligible for years due to non-qualifying insurance, you might now have enough built up by retirement.
Also, HSAs are not a good option if you start your plans for an affordable retirement late in the game. There are available perks, such as an annual $1,000 additional catch-up contribution option for those over the age of 55. However, if you don’t start saving until the age of 50, you likely won’t be able to build up enough money before enrollment in Medicare.
Why is Medicare a consideration in your HSA savings deadline? It’s important because Medicare is not an HSA-eligible insurance plan. That means once you leave your prior insurance coverage and make the switch, you can no longer contribute to your HSA. Sure, your total might still grow a bit if you have the fund invested in the market. Ideally, though, you should have the necessary funds built up by Medicare enrollment time.
VA Benefits
If you are a military veteran with certain qualifications, you might have VA coverage for a variety of long-term care services in retirement. Depending on your exact VA benefits, you will likely be covered for doctor visits, some long-term health care, and therapy services. But before you check retirement health funding off your planning to-do list, you’ll want to look for any significant gaps.
For example, VA benefits typically do not cover room and board at assisted living facilities. However, they may cover some of the costs of in-house assistance. So if you would like to have assisted living arrangements to be an option for an affordable retirement, you will need to find other ways to cover the costs.
If you research your benefits and find significant gaps, you might want to consider also contributing to an HSA. Having those funds set aside to cover unexpected needs can provide comfort that you’re more likely to be in your desired living arrangement.
Long-Term Care Insurance
Long-term care insurance is an option for those who want to ensure coverage for long-term care facilities. While it is possible to cobble together Medicare, Medicaid, and other options to offset these costs, it can be difficult to navigate. Also, location choices might be sparse.
With long-term care insurance, premiums go up significantly as you age. For most people, the ideal time to begin paying premiums is while they’re in their 50s. Any younger and lower rates may not justify the additional years you will potentially be paying in. If you wait longer, the premiums increase at an alarming rate.
Another method for obtaining long-term care insurance is to attach a long-term care rider to an annuity contract. If you have pre-existing health issues, you are usually more likely to be approved for coverage.
The decision on whether or not to take out long-term care insurance is complicated. You should consider your health history, other funding, and your housing preferences.
Get Through the Planning to Get to the Good Life
Retirement is a time to reap the benefits of your hard work. Sometimes we get so caught up in what we want to do that we forget about how we want to live. A big part of how we want to live usually involves our housing arrangements.
So when you’re checking in on how your retirement plan is coming along, make sure you keep housing in mind. Between gaps in coverage or outside-the-box options, you could be missing out on important timelines. By taking action at the most beneficial times, that’s when you see the best results for a successful retirement.
