12/11/2013They're called "upsizers." They're seniors nearing retirement who aspire to the ownership of a larger, more luxurious home to enjoy in their golden years. But can they afford to increase their housing costs without sacrificing their retirement security?
Personal finance experts say that the answer hinges on a few points: Have the upsizers in question amassed a large retirement nest egg? Are they due a traditional "fixed benefit" pension? How much income do they expect from Social Security?
"One very important factor is when you expect to file for Social Security. The longer you wait -- up to age 70 --the more money you'll get every month," says Eric Tyson, co-author of "Personal Finance for Seniors for Dummies."
Most people claim benefits as soon as they're eligible, at age 62 for the current generation. But Tyson urges people to consider waiting until their "full retirement age" of 66 to stake their claim, or better still to wait until age 70 to obtain significantly higher benefits.
Andy Landis, author of "Social Security: The Inside Story," says many people who could afford to hold out for larger Social Security benefits don't understand the implications of filing their claim at age 62 when they're first eligible to do so.
Landis, who conducts retirement planning seminars for large employers and financial planners, acknowledges that many people claim their benefits at age 62 simply because they're strapped for cash to meet current expenses. But he says others file early out of fear that Social Security will run out of funds, a fear he dismisses.
"It would be political suicide for Congress to end a program for current retirees that's so tremendously popular," says Landis, who blogs at www.retireusa.net.
Mark Miller, author of "The Hard Times Guide to Retirement Security," who blogs at www.retirementrevised.com, says that the decision is a personal one, involving such factors as personal health and desired quality of life, and that it must be made carefully. If you have a poor life expectancy or want to travel while you're still relatively young and spry, filing early may be the way to go.
Shawn Koch, a certified financial planner, says if they can afford to wait or can use other income to fund their needs and plans, most seniors are better off waiting to age 66 or even 70 to begin collecting benefits.
"Remember that Social Security is inflation-adjusted, and, once you file, you'll get risk-free benefits for the rest of your life. It's really a kind of longevity insurance," says Koch, who's part of the Garrett Planning Network.
Here are a few pointers for retirement age homebuyers:
-- Think holistically about your retirement income needs.
Tyson, a former financial adviser, recommends that before they start shopping for a better home, seniors work through their retirement budget with an accountant or financial planner. Alternatively, they could create their own budget by using one of the free retirement income calculators available through such investment companies as Vanguard or T. Rowe Price.
When calculating how long they'll need retirement income to live, Tyson encourages most seniors to assume they'll have a long life, which is increasingly likely. Social Security Administration data show that the average 65-year-old can now expect to live more than 20 years longer. That compares with 14 years for a 65-year-old in 1940.
"It's critical that you think about your retirement income needs for years ahead -- especially if you don't have a large investment portfolio. This is especially important if you're not due for a pension from your employer," Tyson says.
-- Factor in the related costs of upgrading your housing.
Koch says many seniors fail to take into account the related expenses associated with upsizing or taking on ownership of a second home.
"Keep in mind all those extra upkeep costs for a bigger home or vacation property. Also remember you'll be spending more for furnishings, taxes and insurance," Koch says.
-- Remember that your real estate plans are also tied to your quality of life.
Have you long been attentive to the need to save for your retirement years? And have you also invested your savings carefully? If so, Tyson says Social Security could represent a relatively minor element in your retirement income plan. Those with sufficient savings to meet current living expenses can wait until 66 or even later to start collecting their benefits. In addition, they may be able to afford to buy a better home or vacation property without reliance on Social Security.
Tyson says such homebuyers can now take advantage of very reasonable real estate prices, which will likely increase as the economic recovery progresses.
As he notes, some financial planners are biased against the idea of buying real estate in the years prior to retirement. After all, many planners (except those who work on a fee-only basis), make their living on commissions from the sale of investment products and insurance, not real estate.
But Tyson says people who've saved substantial retirement funds or who are entitled to benefits from a traditional pension, or both, could now be well positioned to buy real estate.
"Although you need to look at the numbers, there are also qualitative factors to consider. If you can afford it, it's always wonderful to fulfill your retirement dreams, including those involving a better home," he says. (To contact Ellen James Martin, email her at firstname.lastname@example.org.)
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