Recommendation No. 1 for a secure retirement: “age in place”
Owning a home in which you can “age in place” carries many financial benefits, not the least of which is saving on exorbitant nursing home costs. Photo courtesy of flickr user WriteAwayPR. Lew Mandell, the author of “”What To Do When I Get Stupid: A Radically Safe Approach to a Difficult Financial Era,” is back. His reappearance on these pages comes less than a week after his post, “An 8.3 Percent Return on Your Money, Guaranteed for Life?” — one of the Business Desk’s most highly read posts. And with good reason. Mandell returns Wednesday with equally practical financial advice for boomers looking to maximize their financial security in old age: age in place in an age appropriate home.
“Aging in place” has been the focus of an occasional series from PBS NewsHour’s health unit. Ray Suarez reported on the village it takes to help seniors stay in their homes and lead active lives in the Beacon Hill neighborhood of Boston. And Hari Sreenivasan explored the efforts Age-Friendly New York has undertaken to support seniors — who now represent a bigger percentage of the city’s population than those under 18 — maintain their urban lifestyles.
Mandell acknowledges the psychological and health benefits of aging in a familiar place, but here he also explains the financial importance to owning a home in which you can age in place.
There are many benefits to owning an age-in-place home in retirement. You can plan to live the rest of your days in a comfortable, familiar environment. You can also remain in a cherished neighborhood with beloved friends, stores, restaurants, doctors, places of worship and perhaps relatives.
However, few people planning for retirement (or their advisers) recognize all of the financial reasons why it is essential to live in an age-in-place home and why that home should ideally be owned free and clear. These reasons are so compelling that virtually all of my retired friends (who have read my book) are now trying to buy age-in-place homes or to modify their existing homes to enable them to age-in-place.
First, what do we mean by an age-in-place home? “Aging in place” refers to our ability to live safely and comfortably in our homes as we get older, often to the very end of our lives. Homes that are suitable for aging in place are those that are “accessible” to us as our mobility decreases. Accessible homes include those on a single story that remove the dangers and effort of climbing stairs on creaky legs. Multi-level homes with a master bedroom on the first floor as well as homes with elevators are also suitable for aging in place but tend to be more costly than single story homes. Other features of accessible houses include the absence of stairs to get in or out of the house, good lighting, wide doorways for walkers and wheelchairs and walk-in showers or baths.
Many apartment-style homes are well-suited to aging in place. This is particularly true if they have elevators, few stairs, wide doorways, professional maintenance and a gardening crew. Some condominium complexes in areas that are attractive to retirees, such as Florida, Arizona and California, cater specifically to retirees who are looking for affordable homes in which they can age in place.
(But those aren’t necessarily still the top geographic locations for retirees: see the top 10 cities to age successfully and the eight things your city should be doing to help you age well.)
Many have security forces to protect residents as well as transportation to grocery stores, restaurants and health services, and some even have health clinics on site along with emergency buzzers that can summon help, if needed. Most have other shared amenities such as clubhouses, swimming pools, tennis courts and perhaps even golf courses. Ownership costs can be surprisingly low compared to owning a house since they require tiny amounts of real estate, have far less square footage and share walls and energy, maintenance and amenity costs. My folks lived in a two bedroom, two bath age-in-place condominium on the golf course of an attractive, community in south Florida. Their unit was just re-sold for less than $75,000, showing that aging in place in comfort need not be prohibitively expensive.
Owning an accessible home in which we can age in place is important to keeping our future core expenses down for many reasons. First, and most obvious, owning a home outright in retirement greatly reduces our need for income since we no longer have to pay the mortgage.
In the United States, paying as much as 40 percent of your income for housing has been considered normal. Many of us did this when we were young with growing families and growing incomes. Think of how much better we could have done if we had owned our homes, outright, through our adult lives. In many cases, by not making mortgage payments, our housing-related expenses could have been cut by 75 percent or more.
Contrary to what others may have told us, our standard of living in retirement is not based on what we make or what we spend. Rather, it is based on what we spend and the benefits we get from the things that we own outright such as housing, cars, appliances, furniture and clothing. Economists call the income that we get from owning our homes and other possessions outright, and not having to pay rent on them, “implicit income.” Since we already own so much of what we use in retirement (home, car, furniture, appliances, clothes), the income that we will need to comfortably support ourselves in retirement may be far, far less than the income we earned while we were working and paying for all of these things. So much for fear-mongers who insist that we must have cash retirement income equal to 70 percent of our pre-retirement income! That is just not true.
A second major benefit of owning, outright, an age-in-place home is that it is a wonderful hedge against inflation. Some of our older readers will remember the double-digit inflation of the late 1970s and early 1980s, where costs (including the costs of renting a home) could double in six or seven years. If we own our retirement home outright, or have a fixed-rate mortgage, which I will deal with below, most of our housing costs are protected against inflation and the value of the home is also likely to increase. While there are other ways of protecting against inflation (see my last column on inflation-protected annuities), the cost of inflation-protection is high. Rather than pay for inflation protection, we can save money by reducing our core expenses that are subject to inflation. Much of this can be done by owning a paid-up, low-maintenance, energy-efficient age-in-place home.
Aside from the financial benefits of reducing cash flow needs and hedging against inflation, another huge saving from having an age-in-place home is likely to be the reduction or elimination of very expensive nursing home costs in the future. With an age-in-place home, an incapacitated spouse or single person may be able to live in a comfortable, familiar environment with some outside help for a long period of time at a fraction of the cost of a nursing home. Staying at home can also reduce the need for increasingly expensive long-term care insurance whose maximum daily benefits are often just $150 or so, a fraction of nursing home costs, leaving patients and their families to make up the huge difference.
A fourth advantage of owning outright an age-in-place home is that it can provide you with additional guaranteed lifetime income, through a reverse mortgage, while you continue to live in your own home. Instead of making monthly mortgage payments to the lender, as most homeowners did when they were younger, the reverse mortgage reverses the process and allows homeowners to receive a monthly payment for the rest of their lives. Homeowners do this, in essence, by taking out a special kind of mortgage that doesn’t have to be repaid until they die or permanently leave their homes and their houses are sold. In other words, a reverse mortgage may allow homeowners to age in place in their cherished homes for as long as they live in their homes, and to receive an often sizable monthly annuity check for the rest of their lives, if they like. Some deal!
While reverse mortgages can be a very valuable tool for older homeowners, these homeowners have to be very careful when they choose a company that offers reverse mortgages. It is strongly recommended that they only consider the Federal Housing Authority (FHA) Home Equity Conversion Mortgage, which is insured by the U.S. government and offered only by qualified lenders to those over age 62. Readers should consult the government’s list of such qualified lenders.
Some retired friends with low-rate mortgages resent my strong preference for debt-free homes. They point out their success borrowing money for 4 percent or less and using it to make money in the stock market. However, as I point out to them, this use of leverage is a risky business. As long as the market earns more than the interest that they pay on the mortgage, the spread between the cost of funds (the mortgage rate) and their stock returns is magnified by their degree of leverage. If 80 percent of the value of their home is borrowed, they are leveraged 5 to 1. If however, the market falls by half, as it did in 2008, their loss is also magnified five-fold. Their home would be underwater and their financial assets would be drastically reduced.
In my mind, this isn’t any different from borrowing to go to the casino. Rates charged on mortgages are generally above rates on comparable risk-free debt. To make a positive spread on what you borrow, you must take on risk. Equities can be very risky in the short-run and for those of us who are retired, the short-run may be all that we have.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions