What percentage of retirement money should go to real estate?
Posted by Retirement Advisor
Christina asked:
My parents have reached their retirement age and are planning on buying a home in California. What percentage of their savings should go to the downpayment? They want to maximize the downpayment so that their monthly payment can be easily covered by their Social Security and pention. But I worry that they won’t have enough investment in other areas and will be short on the rainy-day funds. Please help!
Not that I didn’t try…. Grandparents always want to stay close to the grandkids. My husband and I are probably going to be in Ca long-term so that makes it impossible to convince my parents to consider other states. They are not millionairs and they are not going to invest in real estate. Just want to get themselves a place to live and still have some extra money for day to day spending.
GALE
My parents have reached their retirement age and are planning on buying a home in California. What percentage of their savings should go to the downpayment? They want to maximize the downpayment so that their monthly payment can be easily covered by their Social Security and pention. But I worry that they won’t have enough investment in other areas and will be short on the rainy-day funds. Please help!
Not that I didn’t try…. Grandparents always want to stay close to the grandkids. My husband and I are probably going to be in Ca long-term so that makes it impossible to convince my parents to consider other states. They are not millionairs and they are not going to invest in real estate. Just want to get themselves a place to live and still have some extra money for day to day spending.
GALE
November 29th, 2008 at 12:25 pm
if they have a few million to waste, california is an ideal climate. buying a house, however is not cheap. a small 1200 sq ft house will run over three hundred thousand in almost any area they choose. the taxes will be astronomical. even if they earn the top dollar from social security, they won’t be able to afford the mortgage, taxes and insurance for such a retirement location.
December 2nd, 2008 at 1:51 pm
Well first of all I live in Ca and it is expensive. But right now it is a buyers market which is still no where near cheap. You have to be careful using any of retirement. Investment are good but if it is the house they are going to live in this will just be living expensive. Now if they could buy a little duplex or something this would be investment because they should be bringing in some money off the rental. But again rentals are a lot of up keep and when there empty your footing the bill. If they can buy something and live comfortably that’s great. Make sure they get a fixed morg, because the others start out low then go sky high.
December 3rd, 2008 at 6:21 pm
That’s a tough one, Christina.
It’s part of their retirement budget. They have to consider the taxes as well and determine what they can afford. Clearly, they want to do at least 20% to avoid Property Mortgage Insurance (PMI), but if rates are low, they might not want to go much beyond that.
If neither parent works, then they’re not going to be in a high tax bracket and won’t save much in taxes from the deduction that they get for mortgage interest and property tax payments. That consideration is what leads many into just paying off their homes in retirement and taking the standard deduction on their taxes instead of itemizing deductions.
But if they want to live in an area where $1M homes are the norm and only have $5k per month in retirement income — it’s just not going to be possible. In California, there’s still some relief from sky-high real estate prices, but you have to get away from the ocean and away from the cities. They would have to realize that visiting the grandkids might involve a 150-mile drive . . .
One thought — pay attention to parts of the state where population might be expanding. If they buy a place there, they might be able to time it right so the state’s population expands into their neighborhood over the next 10 years or so, giving them a real estate windfall and letting them more somewhere more to their liking. But that’s a lot to ask for when you’re already at retirement age . . .
Good luck to them and to you,
Doug