Every retiree’s needs are different, which means that every person who retires will have to make their own decisions about whether they want to own a house or rent one.
Some seniors have already paid off their homes and wish to keep living there; others are prepared to invest in a property where they can enjoy their golden years; still others would prefer to live in a place where they don’t have to control the long-term maintenance of the property.
When it comes to retirement living, what makes more sense: renting or homeownership? There are pros and cons to both sides of this story. Let’s take a closer look.
Homeownership: Home Equity Has Value
When thinking about homeownership, it’s essential to consider the various ways that home equity has value for you.
Home equity could turn into extra income as you enter retirement, or it could simply act as enough of an investment to float you through your future years. Using home equity as part of your retirement beyond just living in the house, however, requires that you are comfortable making changes to your income strategy.
Selling your home, renting out your home, or taking a reverse mortgage are all ways that some seniors choose to use their home equity to their advantage in retirement. Just as there are both pros and cons to homeownership in retirement, there are also pros and cons to making these changes to your home.
Homeownership: When Keeping a House Makes Sense
Many retirees would be comfortable staying in their house in retirement, but they aren’t sure if that would make sense for them.
If you have a low mortgage, or your mortgage is completely paid off, and you have taxes you can handle, staying in your house is an option.
This may not be possible for those who bought their house more recently. Consider how much the house will continue to cost each month when you have less income in future years; this could help you determine if staying in your house will work for you. Selling may be the best option if you don’t have enough saved for retirement.
It is also vital that you consider how it will be to live in your house in your older years. If you live in a storied house, things like stairs or inaccessible bathrooms could prove to be a big issue to deal with. It’s okay to want to keep your home, but you will also need to be realistic about changes that may be required as you age.
Renting: A Reduction in Responsibility
One of the reasons that many seniors choose to rent is that they can reduce their number of house-related responsibilities as they age. Keeping up with all the needs of a house can be difficult for people of any age, and it can get even more tiring when you are older.
From mowing the lawn to shoveling snow, certain upkeep tasks are nice to hand off to someone else by renting. Additionally, you are no longer responsible for property taxes or similar large financial responsibilities beyond rent and utilities. This can make sense for many people’s retirement plans.
Renting: Flexibility and Accessibility
Another benefit of renting for seniors is that you have more flexibility in choosing where you live and how you live.
The rental property managers at Buttonwood explain that apartment units, condo units, and one-story rentals are often great choices for those who want to have a more accessible living environment. They go on to say, “When renting, it is also possible to change where you are living without significant cost. Unlike buying and selling houses, you can simply end a lease, start a new one, and move to your new location. This gives flexibility that a lot of seniors like to have in retirement.”
Moving as you please in order to be closer to family or friends is a big benefit of renting over buying for many people in retirement.
Homeownership vs. Renting: The Advantages
Choosing between homeownership and renting is going to be a difficult decision no matter what. However, you can start to narrow down your choice by thinking about what you need most in a home. What types of advantages are going to be most beneficial for your lifestyle? Consider those needs and then compare them to this list of advantages for each living situation:
Staying Situated Many people like to continue to live in a home that they feel has long-term stability and doesn’t rely on another person (i.e., a landlord) to be involved. This provides both physical and emotional stability for many.
Tax and Financial Benefits There are several tax perks for owning a home that do not apply to renters. Additionally, homeowners who have paid off their homes may find it significantly more affordable to live in said home. Plus, equity is something that you can keep growing or pass down your line.
A Home of Your Own A lot of retirees have worked their entire lives to be able to call their home theirs, and they want to keep living there. This allows you to personalize as you please without needing to follow any landlord rules for alterations.
Flexible Living Situation You can move as your needs or desires change, and you can do so without dealing with the stress of selling and buying homes.
Accessible Options Find homes that will allow you to avoid home maintenance or live without climbing stairs; these things become important in later life.
Balance Expenses Renting is often less expensive from month to month since property taxes, mortgage payments, house maintenance costs, and HOA fees may be eliminated.
Free Up Finances Selling a house and moving to rent instead gives you more money that you can use to invest or enjoy your golden years.
Whether you are delaying retirement to increase your savings before you stop working or you’re ready to move into this stage of your life, consider the pros and cons of homeownership versus renting before you take the next steps. You’ll be better situated if you ensure that you know what you are getting into in advance.
Written Exclusively for Merriman.com by Madison Smith
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
Do you have a federal or local government pension? Don’t let the WEP or GPO surprise you. The Windfall Elimination Provision and Government Pension Offset, often called the WEP and GPO, are two rules that can leave you scratching your head. Not only do many people find these rules confusing, but they are also often completely overlooked, which may result in a big surprise when filing for Social Security benefits. Unfortunately, this is not one of those good surprises.
What are the WEP and GPO?
The WEP reduces a worker’s own Social Security benefit while the GPO reduces spousal and survivor benefits received from another’s work record, such as a spouse.
Who is affected?
The WEP and GPO affect individuals who qualify for a pension from non-covered (did not pay Social Security tax) employment. These are typically your federal and local government workers, such as teachers, police officers, and firefighters. Whether these jobs are non-covered will depend on the state/employer. Overseas employees may also fit under this category.
For the WEP to apply, the individual must have an additional job with covered earnings (did pay Social Security tax) that qualifies them for Social Security benefits. Thus, the WEP applies to those who have a mix of covered and non-covered employment. Specifically, they qualify for Social Security benefits and receive a non-covered pension. The GPO applies when an individual with a non-covered pension receives a spousal or survivor benefit. Are you scratching your head yet?
Dan works as a public school teacher in California, one of 15 states where teachers do not pay Social Security tax. He qualifies for a pension through the California State Teachers’ Retirement System (CalSTRS). To make extra money for his household, Dan works an additional job during the summer, where he does pay Social Security tax. By the end of his career, he has worked enough summers to qualify for a Social Security benefit. The WEP will reduce Dan’s benefit since he has both a non-covered pension from his career as a teacher and qualifies for Social Security benefits from his summer job.
How will the WEP affect my benefit?
Understanding the details of the WEP is quite complicated. To simplify, the WEP tweaks the Social Security benefit formula, resulting in a reduction of the worker’s Primary Insurance Amount (PIA). The PIA is the benefit amount one would receive at full retirement age. The amount reduced depends on the number of years with “substantial earnings” in covered employment. The Social Security Administration provides the WEP Chart as a reference to understand the potential benefit reductions based on the number of years of substantial earnings. The maximum monthly reduction is capped at $480 in 2020. The amount reduced stays constant for the first 20 years of substantial earnings before decreasing incrementally per year until it is completely eliminated upon reaching 30 years of substantial earnings.
This offers an incredible planning opportunity for those who have already accumulated a number of years of substantial earnings. If you are thinking of retiring and have accumulated 20 years of covered work, it could make a lot of sense to work for ten more years to eliminate the WEP completely. Remember, you only need to have substantial earnings, so part-time work would count as long as you make what is deemed “substantial” in that year. For someone subject to the full WEP reduction and assuming a 20-year retirement, it could be worth more than $100,000.
It is important to note that the reduction is limited to one-half of an individual’s non-covered pension. This primarily comes into play when the majority of an individual’s earnings are in covered employment but have a small non-covered pension. For example, if you had a pension of $600 per month and your Social Security benefit was $1,200 per month, your benefit will not be reduced by more than $300 (half of your pension income).
How will the GPO affect my benefit?
This rule is more straightforward to understand than the WEP. The GPO will reduce an individual’s spousal or survivor benefit by two-thirds of their non-covered pension benefit.
Sarah qualified for a pension of $2,100 per month from a government job. Her husband, Drew, worked as an engineer for a large corporation. Drew applied for his Social Security benefit at his full retirement age and receives $2,600 per month. Sarah applies for a spousal benefit once she reaches full retirement age. This benefit would generally be $1,300 (50% of her spouse’s); however, the benefit is reduced by two-thirds of her non-covered pension. In this case, she would not receive anything since two-thirds of her pension ($1,400) is greater than what her spousal benefit would be.
Let’s say Drew passed away unexpectedly. Sarah would normally qualify for a survivor benefit equal to Drew’s entire benefit of $2,600. Because of the GPO, she will only receive $1,200 since the benefit would first be reduced by two-thirds of her pension ($2,600 – $1,400).
Keep in mind the GPO only applies to the individual’s own non-covered work. If a surviving spouse is a beneficiary of a non-covered pension, their Social Security benefits will not be reduced.
These rules are tricky to navigate and important to understand for those affected. What makes it worse is that your Social Security statement will not reflect the reduction in benefits from the WEP and GPO. This means it requires work and effort on your part to figure out! The Social Security Administration has provided an online WEP and GPO calculator to help with this. It will ask for a birthdate, non-covered pension benefit amounts, and other relevant information to calculate your new benefit factoring in the rule. If you have a family member or friend with a non-covered pension, they may be subject to these two rules. Please forward this on to them or anyone else who may find it useful.
The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.
As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.
What was the original relief for RMDs?
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.
How can you take advantage of this?
This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:
Continued growth of tax-deferred assets
Opening room to make Roth IRA conversions
A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation
We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.
Connect with Merriman to discuss.
Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.
Our team at Merriman has been diligently following COVID-19 pandemic updates across the world and in our own communities.
We have also been hearing lots of questions from clients, prospects, friends, and family.
Can I still retire or stay retired? Am I still able to relocate as I had planned? Should I sell all of my stocks now? Should I go to cash? Should I use all the cash I have to buy in? Should I file for Social Security earlier than planned? How will I pay for a hospital stay if I need one?
If you are worried about some of these things too, I have good news.
We have partnered with America’s Retirement Forum (a nationwide non-profit dedicated to providing financial education to adults) to organize a webinar that can help.
Why trust me?
I am the Director of Advisory Services at Merriman Wealth Management and an instructor through America’s Retirement Forum. I have been helping people transition into and navigate retirement for over 20 years, and Merriman has been in the business of educating investors since our founding by Paul Merriman in 1983.
The short and long-term impacts of the COVID-19 pandemic on the economy
Why this recession may be different from what you have lived through before
5 specific steps designed to protect and maximize your retirement income in the middle of a pandemic (yes, you can implement them yourself)
6 strategies and issues to discuss with your advisor
In this time of worry, false information, and uncertainty, make the choice to spend some of your time learning about what you can do to retire well. And the best part is that you don’t have to put your health at risk or leave the house. All you need is 30 minutes and an internet connection to watch this free webinar.
Don’t delay: Some of the strategies discussed in the webinar are time-sensitive. I would hate for you to miss an opportunity or to take action without having all the facts. We want to help you avoid mistakes and take the proper steps toward securing your financial future.
Stay home, be well, and use this unprecedented time to get informed. Feel free to reach out with any questions.
In a previous Merriman Insight article, we wrote about the “free spousal” strategy for married couples. Shortly after that article was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date.
Many recent articles have been written about the new law changes, so we won’t reinvent the wheel here. Instead, we’d recommend this article for a detailed discussion of the changes. The main highlights are:
The new rules are not retroactive; anyone currently employing a “file and suspend” or “restricted application” strategy will continue to be grandfathered under the old rules, as well as those who “file and suspend” by April 30, 2016 or who plan to use a “restricted application” and are at least 62 by the end of 2015
Survivor benefits and claiming strategies are unaffected by the new rules
“File and suspend” claims initiated after April 30, 2016 will now suspend all benefits based on the claimant’s earnings record (including spousal, ex-spouses, and dependent benefits)
“File and suspend” claims initiated after April 30, 2016 will no longer allow the claimant to reinstate their benefits back to the original suspension date and receive a lump sum payment
“Restricted applications” for spousal-only benefits will no longer be available to those who are not at least 62 by the end of 2015
If you believe the new rules will impact your situation, we recommend contacting your financial advisor to review your options.
Shortly after the article below was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date. Read the highlights of the new law changes here.
In helping our clients make smart decisions with their money, we often spend a lot of time on the subject of Social Security. The rules are complex, but the decision of when and how to claim Social Security can have a big impact on the quality of life for most families. Thus, it’s a very important decision with long-term ramifications. The good news is your advisor can help you evaluate your options so you’re well positioned to make the best decision for your particular situation.
Evaluating all of the available claiming strategies for Social Security is beyond the scope of this article (and would bore most people to tears), so I’d like to focus on one particular strategy that I think has tremendous value: the “free spousal.” I’ll describe it using a real life example, although I rounded the numbers for simplicity.
“Henry” and “Wilma” are both 66. Henry is still working, and although he is qualified to claim Social Security benefits now, he decides to wait because they’re able to live comfortably on his salary alone. His benefits at age 66, which is full-retirement age (FRA) in this example, would be $2,700 per month, but delaying the benefits will earn him 8% more each year until age 70. By that time, his benefits would jump to around $3,600 per month.
Wilma is retired and has her own Social Security benefits. She’d receive $1,800 per month if she claims at FRA, but $2,400 if she waits until age 70. Since they don’t need the extra money right now, she also decides to wait.
Everything seems fine, right? They’ll receive their higher benefits at 70, which will maximize their monthly income for the rest of their lives. I’d wager that most people would be thrilled in this situation!
But they’re leaving free money on the table.
Henry should “file and suspend” his benefits at FRA. Then, Wilma should file a “restricted application” to claim her 50% spousal benefit against Henry’s earnings. By restricting her claim to just the spousal benefit, Wilma’s own benefits can continue to earn the delayed credits. At 70, they can both claim their own higher benefits, just like they had always planned to do. But by jumping through a few hoops, Wilma could receive a spousal benefit of $1,350 per month between ages 66 to 70 for free—that’s an extra $64,800 in their pockets over the four years—without impacting their original plan. Hence the term free spousal!
There are some important steps in this strategy that must be adhered to strictly. First, Henry must file and suspend his benefits before Wilma submits her application because Wilma cannot claim spousal benefits unless Henry has started his claim. The “suspend” part of this strategy allows Henry to continue earning the 8% per year delayed credits, even though he has now filed for benefits. Secondly, Wilma must clearly indicate that her claim is restricted only to the spousal benefit and not her own benefits based on her earnings history. Although she is entitled to both, she can only ever receive one at a time, and while her own benefits are higher than the spousal benefit ($1,800 at FRA instead of $1,350 for the spousal, in this example), if she elects to take her own now, she would lose out on the 8% annual increase.
If the strategy and steps above are a little confusing, that’s okay. The goal of this article isn’t to fully explain the free spousal strategy; instead, it illustrates one of the many planning opportunities your financial advisor can help you with that go beyond your investments. Maximizing your Social Security benefits can be complicated, but you have a wonderful resource at your disposal to help make this very important decision. We’re always available to help!