Remodeling your home is enticing—and hugely popular. But a smaller home might be preferable, or even a granny flat with your kids. Be wary, though, of reverse mortgages
As Jane Austen wrote in Emma: "Ah! There is nothing like staying at home for real comfort."
Problem is, many people's homes—their most valuable asset and the foundation of their retirement plans—are providing scant comfort these days. The Standard & Poor's (MHP)/Case-Shiller 10-city home price index is down 16.3% on an annual basis, and the 20-city version is off 15.3%. Adding to the financial stress are the bigger debt burdens many families carry in their near-retirement years, including hefty mortgages and home equity loans.
It's hard enough under normal circumstances to figure out how much is needed to ensure a comfortable retirement. But the mix of slumping housing prices, oil at around $140 a barrel, and volatile financial markets makes it particularly tough today. With energy analysts increasingly convinced that high oil prices are here to stay, and stock and bond markets expected to remain under pressure, living plans may need to be rethought. At the very least, assumptions about how much a home will appreciate need to be reexamined. Largely because of the drop in housing prices, the median household wealth of homeowners aged 45 to 54 will have fallen by 25% between 2004 and 2009, project economist Dean Baker and research associate David Rosnick of the Center for Economic & Policy Research. Even America's wealthiest 20% will have seen their balance sheets plunge by 27%.
At some point, of course, real estate prices will stabilize and economic growth will pick up again. The question, as always, is when—and by how much. Until the smoke clears, the twin pincers of rising costs and volatile stock prices may persuade an increasing number of older Americans to think about coming up with a Plan B for their housing needs in retirement.
The most practical approach is simply to downsize, suggests Henry K. "Bud" Hebeler, author of Getting Started in a Financially Secure Retirement (Wiley & Sons, $19.95). That's not a very popular choice, however. "We find that downsizing is the ideal in many cases, but it's not the norm," says Ross Levin, a certified financial planner and president of Accredited Investors in Edina, Minn.
One reason may be that families often find that a smaller home doesn't come with a much smaller purchase price. A two-bedroom condominium in an attractive part of a city with all the amenities typically sells for nearly the price of a comfortable four-bedroom home in a tony suburb. "People don't save money on the purchase price by going from 2,500 square feet to 1,700 feet because they [still] want the granite countertops and the Jacuzzi tub," says Joel Larsen, a certified financial planner with Financial Strategies Group in Davis, Calif.
But Hebeler—a former president of Boeing's (BA) aerospace unit and the founder of analyzenow.com, a financial advice Web site—notes that large homes cost a lot more to maintain and are subject to higher property taxes. The savings from running a small home compound over time. Plus, as we age, few of us want to perform maintenance. Smaller yards and single-level homes become more attractive, as do condominiums and townhomes with maintenance staffs.
Downsizing could become more common as energy costs rise and the population ages. Hebeler advises anyone contemplating a smaller residence to act sooner rather than later. "I believe that over the next decade, small homes are going to be relatively pricier than large ones, at least on a dollars-per-square-foot basis," he says. "Smaller homes will be in more demand, and many larger homes will be on the market."
Still, many people are reluctant to move out of their current digs. "Since most people want to stay in their home, they need to look at how feasible that is from the point of view of long-term care," says Larsen. This often means changing the first-time home buyer's catchphrase of "location, location, location" to the aging homeowner mantra of "remodel, remodel, remodel." Overall, remodeling activity is falling at an annual rate of 4.8% in 2008, according to the Joint Center for Housing Studies at Harvard University. But the fastest-growing segment of the remodeling industry is overhauling homes for the 50-plus crowd.
Making your home a place where you can grow old comfortably doesn't mean littering it with sterile-looking devices reminiscent of nursing homes. The trend is to "universal design," which calls for safe, easy-to-use appliances that blend in with their environment. Doorknobs are replaced with handles (easier to open), lights made brighter (for aging eyes), door frames widened (for wheelchair access), and grab bars installed in the shower. "It's no one thing," says George Cundy, architect with the firm Cundy, Santine & Associates in Shoreview, Minn. "It's a combination of things that makes the difference so you can stay there."
These are the kinds of changes Irene Lehman made for her 88-year-old mother, Elise Phillips, who lives next door with four cats in a one-story house in Elizabethville, Pa. Her mother is mentally sharp, active, and doesn't like using her walker, despite suffering from osteoporosis and arthritis. She's also been deeply afraid of institutions since her husband died in a nursing home. To keep her safe, Lehman and her husband installed handrails from her bedroom to the bathroom and grab bars in the bathroom. They also built a ramp to her patio. "We spent a little bit of money for a lot of happiness," says Lehman.
Remodeling a home often involves bigger, more expensive changes. For instance, if you live in a house taller than one story, you might put a bedroom and full bath on the first floor in case stairs become tough to climb. Bathrooms can be made safer with high-quality, nonslip tile and showers that give wheelchairs easy access. Kitchen counters at different heights can accommodate sitting as well as standing. "People in their 50s and 60s often upgrade their homes and spend the most money on the kitchen and bathroom," says Jon Pynoos, professor of gerontology, policy, planning, and development at the University of Southern California. "If you're doing a major remodeling, it's the ideal time to make changes that will let you remain independent."
Some retirees simply move into a separate area in one of their children's homes, so their children remodel. Having a parent move into what is often called a mother-in-law apartment or a granny flat is increasingly popular among baby boomers responsible for both rearing young children and minding aging parents. Zoning restrictions in many single-family neighborhoods prohibit such living arrangements or make them difficult. But the trend is to relax these rules, and AARP is pushing model legislation around the country.
Pynoos converted his garage into a flat for his late father-in-law, then in his mid-70s and frail. He put in good lighting, eliminated sharp contours, and connected an alarm system linking his house with a local security company. Pynoos' kids spent time with their grandfather, who would come to their house at dinnertime. "It was the right amount of privacy for him," says Pynoos. "But he was connected to our family."
GOING IN REVERSE
If you want to stay in your home—and are struggling to find investments with stable income streams—you might be tempted to check out reverse mortgages. The idea behind the products, which are set to have a record year, is simple: They enable people 62 or older to borrow against their home's value. No repayment is made until the house is sold. Money can be taken as a lump sum, monthly, or as a line of credit.
There are a lot of drawbacks, however. Loan costs are high. Recent transaction costs for a 74-year-old in a $300,000 home were about $30,000—half in up-front fees and the rest in monthly fees over the loan's duration. Also, some aggressive marketers are hawking the mortgages along with other high-cost financial products.
A reverse mortgage could serve those who are asset-rich but need an income. For most, however, it should be a last resort. "Once it is executed, people are left with practically no alternative but to stay in the home—even though other things may have happened, such as the only helpful, caring child has moved to another city, or the house is now ill-suited for some disability," says Hebeler.
Of course, some people find it necessary to relocate. Eleven years ago, a doctor at the Mayo Clinic advised Stuart Kaufman to look for an assisted-living facility. Kaufman's wife, Sheila, had early symptoms of Alzheimer's, and the sooner they moved, the doctor said, the easier it would be for her to acclimate to her new environment.
Kaufman didn't like most places he saw—they were dark and institutional. But The Commons on Marice near St. Paul, Minn., seemed more like a resort: light and airy. He and Sheila moved in nine years ago. She's now in the memory care unit, and he visits her all the time. He lives in their two-bedroom, two-bath apartment, for which he pays more than $4,000 a month. "This has extended both of our lives in a very positive way," says Kaufman. "These could have been very difficult years."
Continuous care or assisted-living communities are the most expensive option for seniors. Entrance fees can range from $20,000 to $400,000, and monthly maintenance fees run from $200 to more than $2,500, according to the AARP. Consult a lawyer before signing the detailed contracts. "This is an option for people who really think things through," says Elinor Ginzler, AARP's senior vice-president for livable communities.
Housing options will expand even more as the population ages. But whatever new alternatives arise, decades of experience show that the primary considerations in deciding where to live in retirement are family and friends, neighborhood and community. Some things don't change with age.
Return to the 2008 Retirement Guide