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What to Know Before You Downsize Your Home

What to Know Before You Downsize Your Home

When you picture the home where you’ll spend your retirement, what do you see? For many, the answer is a small bungalow near the beach, a spiffy little condo in the mountains, or a tiny, maintenance-free townhome near their grandchildren. But not all share this dream.

A recent study by Merrill Lynch found nearly 33 percent of Baby Boomers buy bigger homes when they retire. They aren’t interested in downsizing; rather, they want a larger property where scattered family can gather for holidays, or spare rooms for boomerang children. Fifty-one percent choose the reduce-and-simplify route, moving into smaller dwellings to achieve greater financial freedom (64 percent) or fewer maintenance requirements (44 percent).

If you’re among the latter—and considering downsizing—there are a few things financial and real estate experts suggest you determine before you proceed.

1. Know what you want.

The answer to this question isn’t all dollars and cents. In fact, the decision to downsize (or not) is often more about quality of life than it is about money. Talk to your partner about what really matters to both of you at this stage in your lives. Do you want to live closer to your family? Do you long to be part of a senior-focused community? Will less space prevent you from entertaining, practicing your hobbies or participating in other favorite free-time pursuits?

2. Know what your current home is worth.

How much can you actually get for it in today’s real estate market? Numerous surveys have shown that homeowners typically overestimate the value of their property by 10 to 20 percent. Request a competitive market analysis (CMA) from a Realtor familiar with your area. This report will show you the sales price of comparable homes in your neighborhood. You might also consider hiring an appraiser.

3. Know what a new home will cost you.

Real estate markets are improving around the nation. While this means your current property might be worth more than it was a few years ago, it also means that you’re unlikely to find a rock bottom deal on a new place. Once you’ve determined what you need (number of bedrooms, bathrooms, square footage, etc.) and where you’d like to live (such as a preferred neighborhood or metropolitan area), work with a Realtor to get an idea of what such a property is likely to cost you.  

4. Know how much you’ll save.

Whether you’ve always wanted to downsize or are now feeling financially pressured to do so, figure out how much a move will actually save you. A smaller, less expensive home should have lower property taxes. And moving from a single-family property to a condo or townhome can certainly reduce your maintenance and utility costs. However, moving from the suburbs to the city usually means an increase in cost of living. Consider all the variables before making a decision.

Downsizing your home—especially if you’re able to net a nice profit in the process—can be a great way to supplement your retirement savings. However, it’s not the only option. Talk to your financial planner about alternative ways to tap into home equity and reach your retirement goals.

Annuities for Retirement: How do Annuities Work?

Annuities for retirement

Some people say that annuities are not good investment plans because of their high expenses. On average, an immediate annuity owner must pay 2%-3% annual fees, including insurance, management, and other recurring fees. This amount is considered a huge bite compared to other investment options.

While annuities require high fees, they are good retirement investment options. Annuities for retirement guarantee a stable source of income to the annuitants after their retirement.

What are Annuities?

Annuities are basically insurance products and also retirement investment options. They provide payments that could last for as long as the annuity owners live.

Although annuities are created by insurance companies, most of them are actually purchased from insurance brokers, financial advisers, financial planners, or even from banks. Furthermore, most of these sellers ask for commissions, which may amount to as much as 10 percent. This is one reason some people do not like annuities.

Nevertheless, some investment companies that sell annuities for retirement do not charge commissions. These are known as direct-sold annuities. These firms include companies associated with Vanguard, Fidelity, Ameritas Lite, T. Rowe Price, Schwab and TIAA-CREF.

These companies also do not ask for surrender charges. A 7% surrender charge may be required when an annuity owner changes his mind and returns the purchased annuity a year after the purchase. A decrement of 1 percent is deducted to the charge every passing year (e.g. 1 year, 7%; 2 years, 6%; etc.)

(Talk with your financial advisor about all of the options available and review the value and costs of what they offer from the viewpoint of total value you’ll receive over the life of owning that financial product.)

The amount of payment one receives from an annuity depends on the length of the payment period. The shorter the payment period, the larger the payment returns. Owners of annuities for retirement can choose the length of the payment period. It could be either a payment for a limited number of years, or a payment for the rest of the owner’s life.

Types of Payments and How Annuities Generate Income

Basically, there are two types of payments that owners receive from annuities for retirement: fixed and variable. These types of payments are related to the investment option an annuity offers.

In simpler terms, buying an annuity is as if you had given your money to an institution without expecting to receive back the same total amount. The institution, in turn, promised to give you an income return monthly, quarterly, annually, or in one sum.

The institution will invest your money to a subaccount (usually a mutual fund). Your money might be invested in stocks, real estate, etc. In this way, your money will generate steady retirement income and continue to grow.

In variable payment, the annuity owner can choose how his money be invested. The amount of payment or the future value of his annuity depends on the performance of his chosen fund. The growth of the money through investment is tax-deferred. This is the great advantage of annuities for retirement. In addition, when the time to receive the payments comes, an annuity owner will only be taxed based on regular income tax rate. Nevertheless, if the performance of his chosen fund is poor, the annuity owner may receive less payment.

In fixed payment, as its name implies, the annuity owner receives a fixed amount regardless of any circumstances. But the owner cannot choose an investment option. It is the responsibility of the institution to choose what investment option would generate greater investment returns.

Payout Options

Owners of annuities for retirement can choose among four payout options. The first option is Payment for Guaranteed Period. It is a type of fixed payment for a limited period; say, $8,500 annually for 10 years. If an annuity owner dies before the stipulated period expires, a beneficiary will continue receiving the payment.

The second option is Lifetime Payment. The annuity owner will receive payments as long as they live and ends when they pass away. No beneficiary is involved in this option. The payment can be fixed or variable. The amount of payment an owner receives is calculated based on the money invested and life expectancy of the owner.

The third option is Life with Period Certain. This is a combination of the first two options. The annuity owner will receive payments as long as they live and when they die, a beneficiary will continue receiving the payments for a limited period set by the annuity owner when they were alive.

Joint and Survival Annuity is the last payout option. The annuity owner will receive payments as long as they live. When they pass away d, their beneficiary, typically the spouse, will continue receiving payments for the rest of his/her life.

Annuities for retirement are complicated. To avoid a wrong decision, it is best to contact your trusted financial advisor for assistance regarding annuities.