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From The Mailbag: Survivor Benefit Plan Questions

There are so many military benefits topics that are confusing, and the Survivor Benefit Plan (SBP) is definitely one of them.  You have to understand...

Retirement Decision Point: Rent or Buy?

This content is provided courtesy of USAA.

Retirees face many big decisions as they map their futures. But when it comes to financial and emotional implications, one choice may be the toughest: Where to live. Here's a look at three major options and the pros and cons of each.

Homeownership factors to consider - Since this is essentially the default option for those who already own their homes, it holds great appeal for those who are comfortable with their current house and neighborhood.

"If you own your home free and clear, homeownership can be very appealing from a cash flow perspective," says Certified Financial Planner™ practitioner J.J. Montanaro of USAA -- not to mention the lingering feeling of triumph after years spent paying down a mortgage. "If necessary, you may be able to turn your equity into retirement income with a reverse mortgage," says Montanaro. Make sure you understand the pros and cons of a reverse mortgage by consulting with your tax, legal or estate planning professional.

Of course, retirement also can spark a move to a new home -- across town or maybe even across the country. Sometimes these moves are focused on downsizing. Swapping into a smaller home may create a cash windfall, but don't assume smaller is cheaper -- especially if you move to a new area.

Before you become overwhelmed by the vision of a mortgage-free retirement, remember that even a paid-off home faces recurring bills in the form of property taxes, insurance premiums and maintenance and repair costs. And taking care of a home doesn't just hit your wallet. It can place big demands on your time, patience and physical stamina.

The Pros and Cons of Home Ownership

Pros:

  • Not having to make house payments when you pay off the mortgage
  • Feeling of triumph and security after paying off the mortgage
  • Equity you can tap if needed
  • Sense of the familiar as you live out your retirement years

Cons:

  • Responsibility for annual property taxes, insurance premiums and maintenance costs
  • Time and energy spent dealing with maintenance and security

Factors to consider before renting - For many retirees, becoming a tenant is a liberating experience. When something breaks, apartment dwellers just call their property manager. Property taxes? Forget about them. And instead of carrying homeowners insurance, they can switch to a renters insurance policy, which can cost as little as $10 a month.

"Renting can provide you tremendous agility," says Montanaro. "Some homeowners hesitate to move because they're anxious about the sales process. You never know how long it will take or how much you'll get. But with renting, an easy move-out is always as close as the end of your current lease."

Moving into a rental may free up cash. "Home equity is often one of our biggest financial assets," says Montanaro, adding that selling a house can create a cash windfall that can be invested or turned into reliable income by purchasing a guaranteed income annuity.

So what are the major downsides? Montanaro points to two:

  • Inflation. Expect your rent to rise along with inflation. Even moderate price growth takes a big toll over time.
  • Less control of your destiny. "When it comes to renting, the lack of commitment is a two-way street," says Montanaro. Renters always face some possibility that their landlords will choose a new use for their properties, forcing them to find a new place on someone else's schedule.

The Pros and Cons of Renting Your Home

Pros

  • Feeling of liberation from burdens of maintaining a home
  • Freedom to move more often
  • Equity to invest or spend if you sell a home to move to a rental unit
  • Sense of the familiar as you live out your retirement years
  • Spend less on insurance with a renters policy

Cons

  • The potential of rising rental costs over the coming years due to inflation
  • The potential that a landlord could change use of the property and force a move

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This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.

An annuity is an insurance contract sold by an insurance company designed to provide an income, usually after retirement, that cannot be outlived.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

USAA Financial Planning Services is a service mark of USAA that refers to the financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Company in California, Lic. #OE36312), a registered investment adviser and insurance agency and its wholly owned subsidiary. Certified Financial Planner Board of Standards, Inc., owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the U.S. which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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