Location is king in real estate, but for clients planning for retirement cash flow may be a greater consideration, After all, without cash flow, they won’t be able to meet their retirement income requirements.
A key desire for older clients is to age in place. According to a 2017 research article published in the Journal of Financial Planning, “The Effect of Low Reverse Mortgage Literacy on Usage of Home Equity in Retirement Income Plans,” the vast majority of homeowners, roughly 83 percent, wanted to age in place in their current home for as long as possible.
According to a Forbes report, in addition to wanting to age in place, homeowners do not want to “backtrack” in retirement from owning to renting. Only 5 percent of the survey respondents in the study indicated a d
esire to rent if they were to move out of their home in retirement. Once an individual owns a home, most want to keep owning a home.
Chris Mayer, a Columbia University Real Estate Professor and the CEO of Longbridge Financial, explained why “cash flow, cash flow, cash flow” should replace “location, location, location” in choosing retirement housing.
“There is a lot of opportunity for older homeowners to be more strategic about their living situation and let home equity help cover their expenses in retirement. Cash flow can be improved in three ways: moving to free up cash flow, restricting debt obligations, or supplementing retirement income by tapping into home equity through a reverse mortgage.”
For agents and brokers, the first housing strategy clients can use to improve cash flow is to move in order to free up equity or to reduce costs. Downsizing is probably the most common housing decision made in order to free up cash as many retirees are living in homes that are too large, too expensive, and not fit for senior living. Downsizing to a more economical home that allows for aging in place can be a viable strategy because it helps reduce ongoing costs and, at the same time, frees up home equity to support a more comfortable standard of living in retirement.
Another strategy is relocation, which might mean moving to a more expensive house but in a less expensive area, perhaps even to a new state or country. When selling a house and relocating to a new area, it is important for clients to look at the total cost associated with moving, including changes in taxes.
Another cash flow factor is debt management. Taking strategic measures to deal with an existing mortgage can also improve a retiree’s financial situation. Every year an increasing proportion of retirees are entering retirement with a mortgage; the required mortgage payments throughout retirement put a serious strain on cash flow. These mortgage payments can cause a financial strain and risk for the retiree. To address this problem, some people try to make extra payments and prepay the mortgage several years before or early in retirement.
Research shows that this is not the best way to handle a mortgage and actually can be worse for a retiree than just continuing to make normal mortgage payments throughout retirement. One option is to lower monthly payments by refinancing at a lower interest rate.
Another option is to embrace the mortgage and spread out the payments over a longer period of time. While getting a longer mortgage for a retiree might seem counterintuitive, it can actually improve cash flow by lowering monthly payments and, in many cases, increase the longevity of the homeowner’s retirement portfolio.
Ultimately, making strategic housing decisions may be key for a successful retirement for many clients. Too often, they don’t think about how their home factors into retirement planning. Knowing how to help older clients meet their housing needs is a key skill for agents and brokers in today’s market.