We asked financial advisers for some tips on how to handle real estate as you approach retirement. Their advice is aimed at those age 55 to 65, but it can be used by anyone investing in real estate.
1. Figure out how much your home is worth—to you.
For most people, a home "becomes an integral part of their identity, of who they are," says Avani Ramnani, of New Jersey-based Athena Wealth Advisors. Their status in the community is linked to their home, which also holds memories of raising children and the "sweat and hard work" that went into improving it.
All this can make it difficult to sell, even if it's financially smart. Some people will pay almost any price to stay in their homes for as long as possible.
If you know you need to sell, Ramnani advises first going out and finding a new place where you'd love to live. That may make it easier to load up the moving trucks. While lamenting the home you're losing, you can also get excited about the one you'll be gaining.
2. Run the numbers first.
If you're planning to retire soon, you've probably already crunched the numbers: How much will you have to live on? How much will you need? The value of the real estate you own is apt to come into the equation eventually.
But many planners advise running those numbers first without including real estate sales. If you can afford to do so, "don't look at [your home] as an investment," says Marshall Groom, a planner in Richmond, Va. "You have to live somewhere."
3. Downsizing early can pay off.
If your home is worth a lot, and you don't mind moving to cheaper digs, you can unlock a lot of extra retirement money by downsizing. If that's your intention, Kristopher Johnson, a planner at Timothy Financial Counsel in Wheaton, Ill., advises doing it sooner rather than later.
The cash raised can provide money to live on early in retirement, while you leave other accounts—like individual retirement accounts—untouched. That gives your nest egg more time to grow untouched, Johnson says. It also gives you more flexibility in dodging tax bills.
Keep in mind, however, that you might need to pay taxes on any real estate windfall. Consult an accountant or planner to make sure your calculation of the benefits of downsizing reflects this possible penalty.
4. Avoid too much real estate exposure.
A key principle for investors is diversification: Putting your money in many different types of assets protects you from bad luck in any one investment.
By the same logic, you should avoid putting more than one-third of your retirement assets in real estate, says Rebecca Preston, a Providence-based planner and member of the Alliance of Cambridge Advisors.
There are a couple reasons for this, beyond diversification. First, real estate is illiquid, i.e., it's expensive and difficult to buy and sell. An unsold, vacant house can be a big drag on your budget, to stay nothing of your psyche.
Second, real estate isn't that great an investment over the long term.
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