Monday, June 02, 2008
Renting vs. Owning in Retirement
Syndicated financial columnist Scott Burns periodically answers reader mail.
He recently answered a letter from a 61 year old woman who was going to pay off her townhouse in 2 years.
The woman made the observation that the townhouse would be 15 years old and, in the near future, would likely need repairs.
She and her husband had the idea to sell the townhouse and rent.
They would put the proceeds (estimated to be $400 - 450k) into a CD earning 5%. This would yield about $20,000 - which would more than cover the rent - without touching the principle.
They would be losing out on future appreciation, but would avoid the costs of home ownership.
Scott Burns thought it was a very good idea - ahead of the crowd. He thinks that middle-income Americans will discover that long term equity will be a "lever" that helps them in retirement.
The only change he recommended was to substitute the CD with a conservative portfolio that includes equities. Because, if they keep the money in utlra-safe CD's - inflation would guarantee that their rent would eventually exceed the income.
For a related post, check out "Should you have a mortgage in retirement?"
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1 comments:
I think selling the townhouse and putting the proceeds into a CD is a terrible idea for three reasons.
1. They are fogetting that rents increase exponentially and could double a couple of times during their retirement. This could mean a 400% rent increase in 30 years.
2. Even if they could get a 5% CD right now, they would be losing money annually, based on inflation and the dollar's devaluation. This isn't an exaggeration, it's happening to many retirees and it may continue for years.
3. They have control over their townhome, but not over renting. They could get a 30-day notice at any time and have to move to a more expensive place. I have some friends who just got booted out of a house on short notice after 14 years of renting.
My advice is for them to keep their townhouse, which is a real asset that will hedge against inflation. And, they will have control over their future to enjoy their retirement. They can always sell it later, if they need to.
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