When Prime Minister Lee Hsien Loong listed the various ways in which a “cash poor” senior can get extra income from his/her home in retirement, he said, “It is better if you keep your property. Even if you rent out the whole flat, it does not matter, it is yours, and you can fall back on it for your old age, just in case anything happens.” I disagree, though I understand and appreciate where he’s coming from. He’s worried that many people who end up selling and cashing out their property would not be able to appropriately ration the lump sum earnings and make their windfall last throughout the remainder of their lifetime. This is why he put constraints on taking lump sum withdrawals of one’s CPF. Additionally, owning a home provides some assurance that you will have shelter, which is a basic need. But in the case of selling your own property, I believe if you are prudent with your money (perhaps you can buy an annuity with the proceeds, or just keep it liquid in an account), the option to cash out your property should be a viable consideration for seniors.
So where would the “homeless” seniors live? Prime Minister Lee suggested that they live with their children, but to give seniors more flexibility, they can always rent and become tenants themselves. I’m a little disappointed that this wasn’t mentioned as an option for them. There are many benefits in renting (please see my previous post here), but for a senior, renting can be one of the best options for them. In the US, many seniors are tenants. In fact, many prefer to rent rather than to own at this stage in their life. Here are the top 5 reasons why renting makes sense for seniors.
1. Selling their existing home and then renting allows them to tap into the equity of their home and liquidate it (i.e., cash out of their home). This is a more straight forward option for freeing up equity rather than to take a home equity line of credit or doing a reverse mortgage, as both of these financial instruments require fees, paperwork, and may have a lot of devious fine print (that no one hardly ever reads).
2. As a senior who gets a steady stream of income in retirement, budgeting for rent becomes easy. For example, if a person receive $2500 per month as a steady stream for life from various sources, he/she might want to rent a place that is $1000 or $1500 a month; the rest can be used for discretionary spending. Many seniors in the US aim to rent a place that is about 60% of their monthly income stream (which is the sum of their Social Security plus any other income from part-time work, pensions, gifts, investments, or annuities).
3. Seniors often don’t want to deal with maintenance or repairs, or with the burden of home ownership. Ever hear of the saying
You think you own your home, but it is your home that owns you”?
It can be a burden owning a home, especially if you are still paying a mortgage. As a homeowner, whenever the air-con, plumbing, or electrical wiring needs to be fixed, you are responsible for it – you bear the cost and you have to make all the necessary arrangements to have it repaired. As a tenant, you just simply contact your landlord and he/she must take care of it.
4. Renting gives seniors more choices of where to live and how to live. In the early retirement years (when capability may not be an issue), seniors might want to live closer to grandchildren or closer to their workplace if they pursue an encore career. As they transition to their later retirement years when they are less capable, perhaps they want to live with other seniors and hire a helper. Perhaps they will want to rent a ground level unit, or one that is nearer to a specific facility or place of interest. Retirement is not a constant state. For many, retirement can be 20 or 30 years, and within those years, seniors may want different things at different stages. Renting gives them flexibility and choices.
5. Owning a home might create estate planning issues, which seniors may not want to deal with. Many seniors have more than one heir, and to avoid possible disputes among their heirs, seniors may choose to liquidate their property while they are still alive, and whatever cash that is left over upon their death will be divided evenly among their beneficiaries. This is a common situation in the US. A senior may have, for example, three sons, and since not all three want to live together, one will have to buy the other two out, but often that one will not have enough money to do so. Or perhaps two out of the three want to live there and can afford to buy the others out. Who will get the property? There can be a lot of conflicts among heirs, and the senior may want to preserve relations with all family members and therefore choose to liquidate the home so that it does not become a difficult to divide asset to bequest.
Frequently asked questions:
What about keeping your home and renting it out?
One option that Prime Minister Lee mentioned was for seniors to keep the property and rent out the rooms or the entire unit. However, seniors may not want to deal with the burden of being a landlord. Though home ownership is considered an investment, yields on rental property are also quite low, especially after factoring in having to pay tax on rental income, real estate agent fees, repairs, cleaning/maintenance fees, insurance, and property tax. Additionally, the money you are gaining from property appreciation during a hot property market is only on paper until you sell the property and tap into its equity.
Does owning a home actually guarantee that a senior will have adequate shelter?
Owning a home gives seniors some assurance that they will have adequate shelter, but this is not a guarantee. The home can be taken away due to non-payment of property tax. Additionally, the home may fall into substandard conditions due to deferred maintenance or repairs, or lack of basic services like water and electricity due to non-payment.
If cashing out of one’s home is a good option, why not cash out your CPF (take a lump sum withdrawal)?
Although I believe one could and should consider cashing out of one’s property, I do not believe this is a wise choice for CPF (i.e., I do not believe one should take a partial lump sum withdrawal). This is because the CPF earns interest, while the money that is locked up in your home does not. Also, keeping money in CPF diversifies your risk. As a senior, it is good for some of your money to be liquid or semi-liquid (for emergencies) and it is good for some of your money to be in interest bearing accounts (and CPF is an almost risk-free high interest account).
What should a senior do with the windfall from their property?
Seniors can use the money to top up their CPF. To diversify their risk, it might be good to use some of it to buy an annuity that will guarantee a lifetime payout. They may also contribute to a Supplementary Retirement Scheme. Of course, it is also good to have some money readily available for emergencies. Often, when an emergency arises for a senior (and they always do), if he/she does not have cash on hand, then assets need to be quickly liquidated and many times, deeply discounted because of urgency. Since each person has different goals, priorities, and risk tolerances, I would recommend consulting a good financial planner, but above all, I would strongly encourage adopting a frugal lifestyle so that you will stretch your dollars and make them last, no matter what your yields on investments are.