Wednesday, October 17, 2012

To Rent Or To Own During Retirement? | Annuity Think Tank: Blog

compare annuitiesWhere to live is one of the biggest decisions that retirees face.

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For many people approaching retirement, the decision between keeping the family home, downsizing to a smaller house or condo, or ridding themselves of the stress and expense that can come with home ownership altogether is a difficult one.

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Here, we?ll provide you with the points you should weigh to make this decision for yourself.

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Three key points to think about

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Keeping a few simple ideas in mind will help simplify the decision between renting and home ownership. Although this is an important choice for any retiree, it?s best to avoid the details of specific ownership and rental opportunities and examine this problem from a big-picture point of view. Keep the following three points in mind as you consider this decision:

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  • What is your budget for renting or ownership net of taxes?
  • Do you view a home or condo as a potential investment opportunity or just another cost of living?
  • Have you thought about the risks associated with ownership from the standpoint of unexpected costs and can your budget tolerate them?

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After-tax expectations

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To begin, the first step in analyzing ownership versus renting is to determine how much money you want to spend net of taxes. Because mortgage interest and property taxes on a primary residence are tax deductible, knowing after-tax cost is essential. Fortunately, the math is very simple and is explained below, which arbitrarily assumes an after-tax budget of $2,000 for mortgage interest, taxes and insurance for home ownership, or for rental costs.

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Because rental costs are not tax deductible, no calculations are required. However, taxes complicate the situation for ownership in that you can spend well in excess of $2,000 every month but still only end up paying $2,000 when you get your tax refund. Essentially, all you need to do is determine your marginal tax bracket, deduct that percentage, and divide your budget by that amount (see table below; assumes a 20% marginal tax rate).

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?????? Net after tax budget??? Divide budget by 0.80 (or 1-tax rate)??? Result: pretax budget

Rental??? ??? $2,000??? ??? ??? ??? ??? ? ? ?? NA??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ?????????????????????????? $2,000

Owner??? ??? $2,000??? ??? ??? ??? ??? ???? ? 2,000/0.80??? ??? ??? ??? ??? ??? ??? ??? ??? ??????????? ????? ? ? $2,500

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The table shows that if your budget is to have a net after-tax cost of $2,000 and your marginal tax rate is 20%, you can spend $2,500 per year on mortgage interest and property taxes. Keep in mind that you need to foot the pretax bill until tax refund season. As such, your cash flow situation needs to be taken into account as well.

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Risks to consider

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Obviously, home ownership has a distinct advantage in that you can theoretically get more for your money. However, there is no free lunch because home ownership also entails substantial financial risks. Such issues as fluctuations in market value, expected/ unexpected maintenance expenses and insurance deductibles can comprise huge additional costs over and above renting. Nonetheless, once you?ve done the math, simply go shopping for homes, mortgages and rental properties that fit within your budget. And don?t forget to plan for inflation; rents, taxes and insurance costs all go up over time.

-Investopedia

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Retirement Planning | Retirement Lifestyle

Source: http://blog.annuitythinktank.com/to-rent-or-to-own-during-retirement/

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