Smart Moves by Ellen James Martin

Tips for Seniors Who Want a Second Home

Many seniors close to retirement aspire to finally buy a second home in a vacation setting. Surprisingly low mortgage rates make that goal seem all the more viable at present. Yet because the volatile economy is now eroding savings accounts, many want to be doubly sure they’re making a safe move.

Take the case of a self-employed couple in their early 60s who dreamed of building a mountainside cottage. But before signing a contract, they first reviewed their finances.

To be sure they were on solid ground, the couple headed to the office of Shawn Koch, a certified financial planner. She helped them compare their savings against their expected future cash flow needs in retirement. She also factored in the Social Security benefits they could collect to help cover their income needs during their non-working years. This gave them the confidence to move forward with their plans.

The reason this self-employed couple could afford to fulfill their home-building plans was that they’d lived frugally and built a sizable retirement portfolio. Equally important was that both could qualify for substantial Social Security benefits once they reached 66, what the government currently defines as their “full retirement age.”

“Although it will never make you rich, collecting Social Security is like purchasing a government-backed annuity with built-in cost-of-living adjustments for the rest of your life,” Koch says.

Lesley Brey, the founder of a fee-only financial planning firm who’s developed an expertise in Social Security, urges anyone contemplating retirement to wait beyond age 62 before starting to collect their benefits, assuming they can afford to do so.

“Social Security benefits are for the rest of your life -- however long you live. People shouldn’t give up this longevity insurance lightly,” says Brey, who’s worked in the financial planning field since 1997.

Here are a few home-buying pointers for those nearing retirement:

-- Seek help to outline a retirement budget.

Eric Tyson, a consumer expert and co-author of “Personal Finance for Seniors for Dummies,” recommends that before they start shopping for a second home, seniors ask an accountant or financial planner to help them develop a retirement budget. Alternatively, they can create their own budget with the use of one of the free retirement calculators available on the internet through such companies as Vanguard (vanguard.com) or T. Rowe Price (troweprice.com)

In making your calculations, Tyson, who formerly worked as a financial counselor, strongly recommends you assume you’ll survive into your 80s or even 90s.

The only people who can afford to assume an abbreviated life span, Tyson says, are those diagnosed with serious medical issues.

-- Avoid claiming Social Security benefits just to fund your second home.

Brey says once they’re eligible, many people find the notion of tapping benefits tantalizing. This is especially likely if they’re anxious to purchase a second home.

“At age 62, the temptation to start drawing Social Security benefits right away can be very, very strong,” she says.

But Brey urges anyone who can hold out for larger retirement benefits at age 66 or beyond to do so. And she says it would be particularly unwise to claim early, with lesser benefits, for the purpose of helping fund a second home purchase.

“In case you live to 94, you want to be sure you have a sufficient financial buffer,” she says.

-- Factor lifestyle preferences into your second home decision.

For many who’ve long been attentive to the need for retirement savings, Tyson says Social Security represents a relatively minor component of their retirement plans. Those with a large nest egg can typically afford to wait until age 66 or even later to start collecting benefits.

Moreover, many in this group can consider the purchase of a second home without reliance on Social Security to help cover their mortgage payments.

As Tyson notes, some financial planners are biased against 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, as well as insurance, and not real estate.

But Tyson says people who’ve amassed a large war chest of retirement assets or who are entitled to benefits from a healthy traditional pension program, or both, could now be well-positioned to actualize a second home purchase.

“Preparing for retirement is not all about numbers. It’s also about having a great quality of life going forward,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)