Selling Options
Selling up and moving to a smaller home is a common way for retired people to increase their income. It is worth thinking through the various financial and practical options when selling your home. At first glance, the advantages of moving to a smaller, less expensive home seem obvious. If you can add to your total equity from the sale of your existing home, and then buy a new home worth less than the equity, you will have extra money to live on. However, there are a number of costs and considerations in this process. First, there are the costs involved with selling your existing home and purchasing a new one. These will include real estate fees, land transfer tax, and legal fees. You will need to weigh up whether the additional equity added will be worth these costs. It is also worth considering and calculating the costs of living in a new, less expensive home. It may be more difficult to do certain things by yourself than in the past, in which case you may want to seek paid help. This can add to the costs of maintaining a home. You should think about what things may cost in the long run before deciding how much money you will actually have in hand from downsizing and moving.
Downsizing
A number of features of UK housing suggest that there are many potential movers below the age of 65, and that a substantial number of these could consider downsizing. These features are that those born in the 1940s and the early baby boom cohorts experienced very large house price inflation. These same cohorts experienced very substantial real increases in earnings and wealth. They are followed by cohorts (notably those born in the 1960s and 70s) who are unlikely to exceed the living standards of their parents. The dissaving of the pre-baby boom cohorts can be expected to bid up the price of housing, before bequeaths to children and grandchildren break the link between housing wealth and life cycle resources. This will take place at a time that a large proportion of the baby boom retirees would like to have greater income and their assets are currently sticky due to home bias in portfolio decisions. Given these features, it is interesting to consider the potential macroeconomic effects of housing equity withdrawal and, in particular, downsizing of housing by retirees. Typically in economic models of house price determination, there is no bequeath motive and housing supply is infinitely elastic. This makes it difficult to assess how housing equity withdrawal would affect the price of housing.
Downsizing involves moving to a smaller, lower-cost property. This releases equity which can be spent on consumption or investment in assets that provide a flow of income. Given that housing equity is usually the largest single component of wealth of many older people, it is worthwhile considering how this can be utilized to improve well-being.
Maximizing home value for retirement funds focuses on three methods by which the value tied up in homeownership can be realized without moving out of the family home. These methods are downsizing, equity release, and renting out spare rooms. This chapter provides an overview of these three strategies that can enhance the contribution that homeownership can make to the standard of living in retirement. Each of these methods can increase financial liquidity by converting housing wealth to cash. This increases the assets available to finance consumption in retirement and in the lifetime as a whole.
Equity Release
There are several means by which you can draw upon the value of your home to support your retirement. However, each holds its own advantages and costs relative to your individual circumstances and is an important decision so seek independent financial advice before making any final choices. Selling and renting both free up the capital in your home and there are a variety of investment options to consider which are beyond the scope of this topic. If you have decided to move but don’t want to disrupt the lifestyle you currently have in your local area then you may want to consider downsizing. This will free up some capital from the sale of your current home without having to move into cheaper accommodation. This decision may be favourable if you are still active and in good health, but does not fully utilise the value tied up in your home and moving expenses can be greater than anticipated after taking into account stamp duty, fees, removal costs and setting up a new home. Renting out your home and moving into a new smaller property is also an option but there are various issues associated with being a landlord and you should consider them in depth before making a choice. Of particular interest is releasing equity from your home. Home reversion plans involve selling all or a part share of your home for a cash lump sum and or income and continued right to live in the property rent free for the rest of your and or your partners life. This is particularly useful if you are in poor health, as your life expectancy will play a large role in the amount of equity you are selling with the equity release provider. However, on average you will only receive around 35-60% of the true market value of the share you are selling because the purchaser is getting a discount with the knowledge they won’t fully own or be able to use it immediately, and won’t get any return on their investment until the property is sold back to them or other circumstances are met, prompting early redemption of the plan. This option consigns you to state of tenancy, and has the significant drawback that you are selling off potential inheritance for your children. High early redemption fees also mean that under this scheme you may be penalised for moving to a care home later in life. Often people have regretted entering into a reversion plan without fully understanding the consequences. So remember to seek specialist advice and consult your family.
Renting Out Spare Rooms
Another way of selling part of the property structure is to rent out space in the house or on the property. Renting can be done in a number of ways. It is voluntary and flexible, and can provide income while allowing the owner to retain the security of the property for future use. On the other hand, if it is perceived as a “taking in boarders,” it can lead to a sense of lost privacy and permanence. Renters may not treat the property with the same care the owner would, and in some cases it may be difficult to evict tenants. Renting can be done on a casual basis, such as renting out a room for a special event like the Olympics, or it might involve taking in tenants on a longer-term basis. The decision to rent out space in the property has important implications for the property owner’s tax liability, which can vary considerably depending on the nature of the rental and the tax laws in the owner’s country. A tax adviser should be consulted before proceeding with renting any part of the property.
Home Improvement Investments
The next place to put your money is with likelihood the most abused room in the house. If the kitchen is man’s paradise, then the master bathroom is his kingdom. Cleanliness counts for a lot, and if your home has one or more old, dingy bathrooms, a bathroom remodel is time well spent. Of all the bathroom projects, installing a new shower or bathtub is one of the highest in terms of value recouped. At £2,500 to £3,600, a new tub will certainly help your home’s value. And still the throne of the modern-day bathroom is the new, upscale shower. It’s been said that “you make a living teaching what you hate doing most”, and for many in the UK, the sight of a fiberglass shower stall will make that statement ring oh so true. An elegant glass pane shower door may run £700 or more compared to its drab vinyl counterpart, but many shower doors are available at a very decent £400, which is certain to be the price of a worthwhile long-term investment. A simple tile shower base or shower pan is another £700 to £1,000 upgrade that will add a greater long-term value.
Arguably the most important improvement to make is in the kitchen. A £15,000 kitchen update adds £11,000 to the value of your home, recouping 73 percent of the cost – the highest ROI of any major kitchen remodel. It goes without saying that the kitchen is an invaluable piece to the puzzle in any home, and a fine kitchen is an asset to any home. In the past, “home improvement” simply meant repairing or upgrading an older, decrepit kitchen. Prices and availability of products for the kitchen have changed considerably in the last 5 years. Now, with a myriad of styles and products available, many price points exist for classic to modern/contemporary kitchen styling. For a home worth about £250,000, a £50,000 or less price tag is still possible. And the aforementioned £11,000 ROI can be depreciated as the years go by.
Home improvement has always been considered a wise investment, especially in today’s unsteady housing market. While the majority of homeowners are content to sit on their hands after moving into their new residence, major home improvement offers a significant ROI (return on investment). As the essay later describes, carrying a substantial amount of your retirement capital in home equity may be hazardous due to the lack of diversification. However, simply cashing out of your home and sticking the money in low-risk investments isn’t the solution either. Low risk often equates with low return, and when you factor in the long-term effects of inflation, most CDs and Treasury bonds actually lose value over time. Considering this, if one can achieve a high ROI on a home improvement project, there may be no better place to invest that money than right back into your house.
Kitchen Renovation
ou should write at least four days, especially using the first day to clean the kitchen area. Firstly, the older cabinets could be refinished, which an individual can do without hiring anyone to make a huge difference in the appearance of the kitchen. Simply clean the older cabinets, then apply a new smooth finish or a darker stain for a modern contemporary look. Hiring an interior designer would be a good investment to help choose the right color schemes and materials, and he/she can also be on the lookout for discounted products. Most interior designers can get all appliances and materials at a cheaper price than any retail outlet. This gives the employer leeway to change his/her original budget. When choosing marble or granite countertops, try to get in touch with the supplier and explain that you are maximizing your home’s value and renovating your kitchen for the purpose of selling to see if you can strike a deal on the material. If applicable, try using leftover materials to redo the flooring. Don’t forget to purchase new energy saver appliances, and stainless steel is always a plus for added aesthetics. With any money left over, the kitchen area can be accented with LED wall lights to replace older dimmer wall lights.
Bathroom Remodeling
High-efficiency particulate air filters are terrific for people with allergies and respiratory conditions. Unfortunately, some people are convinced of their efficacy because they feel better while standing near the air cleaner unit. Take the extra step and correctly install a central air system with an electric air cleaner and return air vent in each room. This may not have a high visible change on the room, but air is essential to life, and opting for a more comprehensive air-cleaning solution will add tremendous value in terms of enhancing the quality of life for the occupants of the home.
In a recent NAHB survey, 48% of homesellers added a whirlpool tub, 29% added a dressed-up shower, and 24% added a shower with a seating area. These are luxury items, and keep in mind that accessories and fixtures quickly balloon the cost of bathroom remodeling. Get the most value for your money by simply installing the larger shower, regardless of whether a person likes to use a tub. Taking a shower is much safer, and people can retain their existing tub in a separate bathroom used primarily by guests.
For many people who are going to retire and use their home equity to finance their retirement, the bathroom is the most dangerous room in their house, remote from the rest of the home and frequently not a part of the living area. Falls are a big risk for the elderly and a soaker tub with a high wall presents an unnecessary hazard. The solution is a low or no threshold shower base and a built-in seat. Another big risk is stepping out of the tub or shower onto a wet floor surface. Maximize safety with a well-designed shower surround and floor-to-ceiling grab bar installed on unreinforced walls. Think of the surrounding areas they should be accessible without walking but often aren’t. This could involve moving a laundry from the basement to the first floor. Other times it’s just being able to access the essential utilities in the basement. This is not glamorous and not worthy of the 8-20% rule but it’s a smart investment in your quality of life.
Energy Efficiency Upgrades
There are many energy efficiency upgrade options, both for homeowners who plan to remain in their homes for a long time and for those who are considering selling. The possible improvements range from simple measures a homeowner can accomplish on his or her own to more complex investments that would require assistance from a professional. Adding a layer of insulation to the home is one of the most effective ways to save money on energy bills. The Environmental Protection Agency has estimated that homeowners can save an average 15% on heating and cooling costs (or an average of 11% on total energy costs) by adding insulation and sealing air leaks. In a study conducted by Remodelling Magazine, insulation was ranked as the most cost-effective of all home improvements when recouped in the resale value of the home. This is a step that can be accomplished by a trained professional with relative ease. DIY-inclined homeowners can easily locate areas in which outside air is seeping into the home and plug the leaks with caulk and weather stripping. In addition, low-cost items such as installing a setback thermostat or replacing incandescent light bulbs with compact fluorescent bulbs can be easily implemented and will have an almost immediate payback. A more interesting do-it-yourself possibility lies in energy-efficient landscaping. Well-placed trees and shrubs can save up to 25% of a typical household’s energy for heating and cooling.
Garden Landscaping
There’s a great deal you can do with a landscape to enhance the value produced by the backyard. Setting up a patio to eat and entertain on is a smart idea if the space allows. If you have children, a play area may attract young families. Building and properly maintaining a fence can create a sense of enclosure and make the backyard more functional. And last but not least, installation of high quality sod in place of weeds or existing grass goes a long way with the aesthetics of a landscape. Patios are crucial in some areas and much less important in others. The majority of house sales in the Chicago area, for example, don’t mention the patio at all in the listing, but in the southern United States the ability to “use the backyard” is crucial to many homebuyers. As a general rule, a home in a higher price range will require a larger and/or higher quality patio to add value. Be sure that the cost of installing the patio is proportional to the increase in home value you expect to receive. High-end patios rarely provide a good return on investment.
Utilising Government Schemes
There are several government schemes in place to help people buy and take out mortgages on their own home. The Help to Buy scheme: Equity Loan is available to first-time buyers as well as homeowners looking to move. The government will lend you up to 20% of the value of your new build home and up to 40% in London. You will need to pay a deposit of 5% and arrange a mortgage for the remaining amount. You won’t be charged loan fees on the 20% loan for the first five years of owning your home. This scheme is a good way to leverage retirement funds and free up the substantial amount of money tied up in the equity of a property. This particular scheme is not just for retirees; it can be used at any time. However, it is a good way to downsize and less demanding housing for the elderly can be accommodated in. Another advantage of this scheme is that loan repayments only need to be more than the initial loan percentage value, which is a maximum of 20%, so when the house is eventually sold, the equity value will still have increased. This scheme runs until 2020, so there is plenty of time to get involved.
Help to Buy Scheme
The Help to Buy scheme was announced in the 2013 budget and is supported by the Treasury. Despite only recently being put in place, it is still in operation today and is scheduled to run until 2020. The scheme is predominantly aimed at first-time buyers who may have small deposits but are finding it difficult to obtain a mortgage. Help to Buy offers an equity loan where the government will lend a homebuyer up to 20% of the value of a new build home. The loan is interest-free for the first five years and can allow homebuyers to access better mortgage rates available with a lower loan-to-value. The equity loan is available on new build homes up to a maximum value of £600,000 where buyers need a minimum 5% deposit. The aim of the scheme is to stimulate the market for new build homes, increase the supply of private ownership, and help to increase jobs in the industry. This can have positive effects for older homeowners who are looking to downsize from larger family homes to smaller, more manageable properties on the private market. With increased activity in the new build homes sector, it may increase the availability of high-quality retirement properties on the market in years to come. Using a smaller new build house as a step down from larger family homes and then using the equity loan can be a cost-effective one-off transaction for many older homeowners.
Right to Buy Scheme
Those entering retirement are being encouraged to downsize from their larger family homes in order to free up much needed housing for younger families. This in itself has become another problem as those in the 55+ age bracket are finding it difficult to raise enough capital to make the move a feasible one. It was thought that the help to buy schemes revolving around new builds did not involve enough assistance to make the selling and buying process a smooth one, and the general consensus was that it was causing more stress and anxiety for those moving than it was actually helping. Despite this, the government has extended the help to buy scheme to 2020 and is now focusing on the existing homes market with the right to buy scheme. The right to buy scheme is aimed at those who are social housing tenants, extending to the older generation looking to swap their family-sized home for a smaller property. The discount given on these homes is much larger compared to that available for the younger generation buying new builds, and the amount is based on the length of time the social housing property has been rented. The discount figure, currently capped at £103,900 per property, applies across England. Hodge (2016) states that there are 1.17 million pensioners who live in social housing, and only one third of this number hope to take advantage of the scheme.
Shared Ownership Scheme
The case study of Ed and Pam Hill is about a retired couple who are looking to maximise their home value and the effects on their entitlement to housing benefit. Although shared ownership is relative to their situation, since they own their own home currently and that is a prerequisite for the scheme, it is still relevant. If they were to sell their home valued at £150,000, and then downsize and purchase part of a £100,000 shared ownership property, they could release the £50,000 difference to provide an income buffer and maintain their standard of living. By doing this, they would be disqualified from claiming support for mortgage interest or getting help with the interest payments to top up their mortgage to the SMI level, because releasing equity from a property is deemed as a capital transaction, regardless of the fact that it would not affect their entitlement to SMI when it becomes a loan from April 2010. They could however use the money released on the £50,000 for any future expenses, as capital only affects entitlement to income related benefits and is not means tested. Furthermore, the rent they would have to pay on the share of their property from the housing association would also not affect their entitlement to housing benefit, because it is ignored as a deduction of notional income from the share. This is a key benefit for those who are downsizing and looking to release new capital or have an income buffer, yet are still reliant on other benefits.
The shared ownership scheme is a cross between a part buy/part rent scheme and the right to acquire scheme. The government or housing association owns part of the property, and you purchase the rest with a mortgage. The share you rent from the housing association is at a reduced rental rate, which is usually up to 3% of the capital value of the share. Eligibility is customer based, where they should be a UK citizen or have indefinite leave to remain. They should also not currently own a home, or be in mortgage/loan arrears.
Financial Planning and Investments
Investment is a key area for any retiree, as they may no longer receive the same income. This investment needs to be safe but also fruitful, ensuring there is enough income for the remainder of their life (Chambers & Dimson, 2013). The most common form of investment for a retiree is investment into more bonds, as these provide a regular income for a set number of years. This pattern of income can match the duration pattern of the liabilities. If the investor knows that they are going to live for 20 years post retirement and they want to generate £40,000 a year, and then £20,000 could be invested into an inflation linked government bond that will pay £2,000 per £100,000 for 10 years. The remaining investment would be invested in a second identical bond. This would match the duration of the bonds. Many retirees are moving towards investing in bonds however, by the very nature of the recent pension reforms it will make it easier for them to access their pension and invest in an alternative asset. Retirees have often used their state pension as a secure form of income and reinvested any private pension income. By buying an inflation linked bond with the state pension income, it will provide the same security. This simple strategy can be extended to duration bond matching by investing the private pension in different bonds to provide an income to match any additional state pension income. This can be based around any forecast of lifetime wealth and any investment into higher risk higher return assets can aim to increase the standard of living in retirement. Bond investment is an ideal strategy and can be easily defined to provide a certain pattern of income for a set number of years.
Pension Funds
Pension funds may be the most obvious vehicle for retirement investment, yet a large number of people are not taking the appropriate action to maximize its potential. All too often when working through one’s life there will be numerous employers each with a different pension fund sponsored by a different financial institution. The typical result is a collection of individual funds, each of them rather small in size and often ignored. It is therefore worth grouping these funds together into a single scheme, and if there is a possibility of doing this at no cost it is likely to prove advantageous. By doing this the individual will be able to take greater control over the investment and there may be a wider choice of fund managers. In addition, a large single fund often has lower charges than a bunch of smaller ones (Practical Law Pensions, 2008). This refers to administrative charges and the TER (total expense ratio). The former is deducted directly from the investment and the latter can affect the growth of the investment. If you were to invest £100,000 and the TER was 2%, the cost is £2000. The majority of TER is not included in quotes for management and investment consultancy and can vary from fund to fund. An indication of whether a TER is low or high can be obtained by comparing it to the TER of comparable funds (same investment sector), and if it is high, a consultation with the investment manager may be necessary. It has been shown that low cost pensions can have a significant impact on the eventual retirement income (Blake, D. et al, 2006).
Stocks and Bonds
Stocks and bonds are both viable investments for holding one’s wealth. Stocks are considered to be more risky than bonds and therefore expected to provide a higher return over the long run. The greater the expected return an investment offers, the more risk an investor must take on, in order to secure the potential financial gain. In the case of stocks and bonds, it is well known that stocks carry more risk than do bonds. This is the case because the bankruptcy of a company would first leave bond-holders unpaid and then leave stockholders with partial or no value for their investment. This occurs on the grounds that in the event of bankruptcy, all debts must be paid before stockholders are entitled to any leftover money. A company with a high amount of debt relative to equity might lower the price of its bonds to a significant degree, due to the high risk of investors losing their money. This can present an opportunity for less risky investment in the form of bond purchasing, on the basis that the company will not go bankrupt and therefore will eventually repay the bonds at their full value. Bond prices can change according to supply and demand, as with all market prices. So should one with a low risk preference take on investment in stocks and bonds, or merely select the less risky bonds offered by stocks? Choosing stocks traditionally involves a greater amount of research and monitoring of one’s investments, when compared to bonds or bank interest. Stocks are bought in the hope that they will rise in value and provide future dividend payment. Price changes are unpredictable and there is an equal chance of either making a gain or a loss when selling stocks. For those with a substantial knowledge of economics and the ability to continuously monitor a changing investment, the potential returns on stock investment can prove to be a wise long-term strategy. An international stock portfolio can provide hedging against currency-specific risk to the investor’s home country. Should the investor wish to, stocks can be sold at any time and used as a form of finance. This is in contrast to bonds that have a specific term and are intended to be held until the date of maturity.
Property Investment Funds
For direct investors into property, the ability to finance a house purchase from within a pension scheme with tax relief at a higher rate of 40 or 50% presents an attractive opportunity to maximize the value of their accumulated pension savings. However, such individuals need to be mindful of the risks and costs associated with being a landlord, and the lack of diversification in the property investment, not to mention the issues of illiquidity and equity release in a home income plan. As such, property investment funds could provide a more suitable alternative for those seeking to use property investment to enhance retirement income, with a choice between residential and commercial. For both commercial and residential property, investment entails investment via the stock market, either directly in shares of property companies or indirectly through pooled investment. In the case of residential property, an equity release scheme could potentially release home equity to create an income stream and/or capital sum, but it has similar disadvantages to a reverse mortgage.
This is a specific type of investment fund that can be used to save for a mortgage on a property or a lump sum to ‘roll over’ into an immediate annuity. There are various types of property investment funds, which could be operated at a state level (local government pension scheme funds) or via a financial intermediary or insurance company. Essentially, they are designed to enable investors to access the potential higher returns from property investment while providing better diversification and liquidity than direct investment in property. It is the potential to secure a better or more certain retirement income through an investment in either residential or commercial property that is the primary focus.
