WHERE WILL YOU LIVE when you retire? Even if you're madly in love with the home you've raised your family in, there may come a time when you begin to consider something new. Perhaps something smaller--or closer to your kids now that they're grown. If a retirement community is an option you're considering, there's no shortage of choices. Communities catering to people 55 and older are showing steady growth. Housing development in 55+ communities saw a surge in 2013 and 2014 and is projected to continue growing through 2024, according to The National Association of Home Builders.
Yet just because there's plenty of age-restricted housing that doesn't mean it's right for you—or for your parents. For starters, there are major financial implications. Will a home in a particular community hold its value? Will your family be able to sell it easily, and at a good price? Beyond those issues, you're also choosing a place where you or your parents are likely to spend your remaining years. Making a wrong choice could be a mistake you won't be able to undo. So before you buy, ask yourself these seven questions.
1. Will you be happy living only among people your age—or older? An age-restricted community may feel odd if you're used to having younger people in your neighborhood. You might also find there are restrictions regarding your children and grandchildren, says John Brady, co-author of Baby Boomers Guide to Selecting a Retirement Community and founder and editor of Topretirements.com. "There may be rules about how long the grandkids or visitors under age 55 can stay with you," says Brady. And what if your adult children need to move home while they look for work? Find out whether the community's rules will allow you to take in an adult child for an extended period.
2. What other restrictions could cause problems? Closely review the homeowner association's covenants, conditions and restrictions. There may be rules about what changes you can make to your house or even what color you can paint your front door, Brady says. More crucial might be questions relating to your estate plan, says Debra Greenberg, a director in the Personal Retirement Solutions Group at Bank of America Merrill Lynch. If you plan to leave your home to your children, they may inherit fees or other encumbrances of the community, and the age restrictions could complicate their ability to take ownership. It's a good idea to discuss this asset with your attorney and spell out how you want it managed in your estate plan before you buy, Greenberg suggests.
3. What are the total costs? Out-of-pocket expenses for these communities may go far beyond the price of the house and association dues. Additional costs such as special assessments and fees could be an unpleasant surprise. You could also find yourself paying extra to use amenities such as golf courses or tennis courts. Keep in mind, too, that future renovations or repairs could cause your dues to rise unexpectedly. "Talking to current residents about add-ons—and about how much costs have risen in the past—can help you know what to expect," says Brady.
Out-of-pocket expenses for these communities may go far beyond the price of the house and association dues.
You may find additional clues if you ask to see homeowner association minutes and audited financial statements. The minutes can give you a sense of how well your prospective neighbors get along and alert you to ongoing community concerns. The financial statements will show whether the association is financially solvent. If the community lacks funding to maintain its pool or golf course, for example, you might be hit with a large assessment a year or two after you move in.
Once you have a reliable estimate of total costs, consider whether you can afford them, says Greenberg. "You don't want to be strapped for cash, or forced to dig into your savings principal," she says. If the numbers don't add up, you may be better off in a community that offers the amenities you truly value, without the cost of extras you don't.
4. What's the potential resale value? One important factor is whether you're buying a condominium or a single-family home, because the latter tend to fetch higher prices. Also consider the relative health of the local housing market. In the wake of the devastating real estate crisis from 2008 to 2011, people are still suffering in many parts of the country, including Florida, Arizona, and other popular retirement destinations. If homeowners in the community you're investigating are having trouble staying current on their mortgage payments or association dues, it could lead to foreclosures and depressed prices. "If the homeowner association can't provide this information, this is a warning bell you should listen to," Brady suggests. It's also worth looking around the area to see how other properties near the community are faring, because those also could affect your investment.
5. How should you pay for your retirement home? If you choose to buy, you'll need to decide whether to pay cash or finance the purchase, says Greenberg. If you're selling another home, it may seem simplest to use the proceeds to buy the new one outright. Depending on your tax and income needs, however, it might be better to use part of the cash from the sale as a down payment and finance the balance with a tax-deductible mortgage. It's important to check with your tax advisor about your options.
6. How good is local health care? Your prospective community may offer an award-winning golf course, but check to make sure there's also a respected community hospital or academic medical center nearby. Ask residents about their primary care doctors and specialists, and check the state and national ratings of hospitals, says Brady.
If you want a community where you or your parents will have easy access to care as needs increase, a continuing care retirement community could offer a smooth transition from independent housing to assisted living or 24-hour nursing care, all in one place. Keep in mind that having medical services on the premises generally results in higher costs than you would pay in other retirement communities.
7. How will this purchase affect other retirement goals? As with any other major financial decision, buying a home in a retirement community isn't a decision to make in isolation, says Greenberg. Balance the costs of your new home against the things you most want to accomplish. It's all part of the process of reviewing potential trade-offs before you buy, rather than after, she says. "This is where it's really helpful to be forward-thinking."
3 Questions to Ask Your Advisor
- How can I determine whether I can afford to move into a new home now?
- Can I lock in today's low interest rates when I buy a home in a retirement community?
- What steps can I take to ensure this purchase doesn't negatively affect my heirs?
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Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Bank of America Merrill Lynch nor its financial advisors provide tax, accounting or legal advice. You should consult your legal and/or tax advisors before making any financial decisions.
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