Should I Rent or Own in Retirement?

I often get this question from clients and given that housing can be your single greatest monthly expense at any age, it pays to put some thought into renting versus owning once you’re retired and on a fixed income. Here are some of the benefits and drawbacks to both options.

Pros of Owning a Home in Retirement:

It’s not uncommon to grow attached to your home, so much so that you’re willing to hang onto it even once money gets tighter. But while homeownership is unquestionably expensive, here are some good reasons to own in retirement:

• You won’t have to worry about your rent going up. While your outside costs, like property taxes and maintenance, might fluctuate, if you have a fixed mortgage, you won’t run the risk of your actual housing payment increasing during retirement. Furthermore, since 70% of homeowners 65 and over enter retirement mortgage-free, you may not even have a payment to deal with at all.
• You’ll have a potentially an asset to leave to your heirs. Even if you spend down your savings in retirement, you can always pass your home on to your beneficiaries.
• While I don’t necessarily recommend this, the equity you build in your home can become a source of income. If you aren’t underwater on your mortgage, you can use your home to take out a line of credit when you need money.

Cons of Owning a Home in Retirement:

But owning a home in retirement isn’t all roses. Here’s the downside of owning during your senior years:

• Maintenance can be costly. The average homeowner spends anywhere from 1% to 4% of his or her home’s value on annual upkeep, but if your home is older, you’ll probably hit the higher end of that range. Additionally, as you age, your ability to tackle maintenance items yourself might decline, which will only add to your costs. And since you never know when a major repair might creep up on you, owning a home while living on a fixed income can be a pretty risky prospect.
• You’ll always have property taxes and homeowners’ insurance to contend with. Even if your mortgage is paid off by the time you retire, these costs of ownership won’t ever go away. Property taxes can be an exceptional burden for seniors, especially since they’ve proven to rise over time, even during periods when home values decline.
• Your home may not be as valuable an asset as you think. While it’s true that owning offers an opportunity to tap some equity or leave something behind to your heirs, all it takes is another housing market crash to crush your property’s value. You may be better off finding a cheaper rental and using whatever money you save as a source of income or potential gift for your heirs.

 Pros of Renting a Home in Retirement:

Homeownership isn’t for everyone, and even if you’ve eliminated your mortgage debt, it might pay to unload your property and rent instead. Here are a few benefits of going this route:

• Your housing costs are limited to whatever your rent is. Renting eliminates the risk of growing maintenance costs or unanticipated repairs. And fixed costs tend to work better than variable costs when you’re dealing with a fixed income.
• Renting is almost always cheaper. It’s generally less costly to rent a home than to buy one.
• You have the flexibility to pick up and move as you please. When you’re selling a home, you’re at the mercy of realtors, buyers, and market conditions. On the other hand, if your health situation changes, or if you decide you’re ready to relocate to someplace warmer or cheaper, it’s a lot easier to get out of a rental situation than it is to sell a place you own.

Cons of Renting a Home in Retirement:

While renting in retirement has its benefits, it’s not necessarily the best move either. Here are a few drawbacks to think about:

• Your home won’t be a source of equity. Your rent payments will constitute nothing but an expense, and you won’t get any value out of them other than an immediate roof over your head.
• Your rent can be raised once your lease expires. Granted, you’ll have the option to go elsewhere if that happens, but picking up and moving is costly, and easier said than done.
• You’re at the mercy of your landlord or management company. While there’s something to be said about not having to pay for maintenance and repairs, when you rent a home, you’re reliant on other people to fix problems and keep things running smoothly. Now this is true of all renters, and not just seniors. But if you’re retired and don’t have a job to go to daily (meaning, you’re home more often), you may be more impacted by a faulty sink, broken toilet, or busted radiator that takes days or weeks to repair.

The bottom line is when it comes to owning versus renting a home in retirement, there’s no right or wrong answer. But the more thought you put into your decision, the better your chances of making the move that’s best for you!

 

— Nikki Earley

LNG Tankers Take a Slow Path to Profits in an Uncertain Market

When the tanker Provalys left Louisiana for Chile last month with a full load of U.S. liquefied natural gas (LNG), it sailed around South America instead of taking a shortcut through the expanded Panama Canal. Not only may the route be cheaper without canal transit fees, but advances in technology mean less of the fuel would end up lost at sea during the journey. Gas is frozen into liquid for transport over long distances without pipelines, allowing surplus American reserves to be shipped to high-demand regions like Asia. Trouble is, some LNG evaporates on the voyage. A new generation of ships is reducing such losses, giving traders more flexibility to choose a longer route in search of the highest prices.

Once a regional commodity, natural gas is becoming global. As new LNG export plants come on line from the U.S. to Australia, a glut has emerged and ships are becoming more than just transporters. They allow fuel to be stored until demand rises or a scheduled delivery window arrives. Oil markets have operated that way for decades, but it is new for natural gas, which was historically dominated by long-term contracts to specific destinations. “People use vessels more as trading vehicles,” said Paul Wogan, chief executive officer at ship owner GasLog Ltd. “And once you can get the newer ships out, you can use them almost as storage vessels” because improved insulation keeps the LNG in its liquid state for longer, he said. New vessels allow for longer voyages because their rates of boil-off, or LNG evaporation, are about 0.1%, compared with 0.15% a decade ago, according to Wogan. Ships built from this year on will bring the rate down even more, he said.

The average distance for cargoes from the U.S., which have traveled as far as Thailand, has reached 7,500 nautical miles, about double the global long-term average, according to Wogan. The average voyage speed from Louisiana’s Sabine Pass terminal—the first to ship U.S. shale gas—has been 14.3 knots, compared with an average of 16 to 17 knots for other tankers over the past few years, he said. Longer routes allow U.S. exporters to nab bigger profits by selling to Asia—where LNG prices in the Northeast part of the region recently rose to the highest since February—and the Middle East, said Eric Bensaude, a managing director at Cheniere Energy Inc.’s marketing unit in London. Since modern ships have less boil-off, most vessels travel at “economical speed,” he said.

The Provalys is due to arrive at Chile’s Mejillones terminal in late August, making the journey via Cape Horn, according to ship-tracking data. An alternative route through the expanded Panama Canal would have seen it arrive about two weeks earlier and would have required paying tolls and securing a slot. “The Panama Canal tolls are very expensive in relation to the current market freight rates, and LNG prices as well as fuel prices,” said Emilie Menard, a spokeswoman at Engie SA, which owns Provalys. “It is sometimes more attractive to travel the longer distance.” The ship was delivered in 2006 and was one of the most efficient of her kind at the time. Short-term LNG shipping rates have been pressured over the past years but may rise this winter, according to GasLog.

Since the start of the year, four ships from Sabine Pass and nine vessels from Qatar, the biggest LNG producer, took longer routes to deliver their cargoes, according to Kpler SAS, a Paris-based ship tracker. Qatari vessels sometimes opt to go via the Cape of Good Hope instead of taking a quicker path through the Suez Canal, and the Symphonic Breeze with a cargo from Trinidad and Tobago, is taking a month-long trip around the cape to China.

The Provalys’s longer journey to Chile would increase shipping costs by about 10 cents per million British thermal units, or $350,000, at current freight rates, according to Sofia Kiriukhina, a market analyst at Kpler. But that may not matter to gas buyers like Engie and Royal Dutch Shell Plc, who often consider their long-term vessel charters a sunk cost. Thus, they are less concerned about making a speedy delivery and releasing the vessel from charter, she said.

Because U.S. LNG is not contractually bound for a specific destination—a departure from traditional contracts—ships carrying the nation’s gas can be diverted en route to get a better deal. Still most cargoes are sold to a particular buyer before they are loaded, Cheniere’s Bensaude said. Meandering journeys for LNG tankers will probably remain common as the gas market evolves, GasLog’s Wogan noted. “These vessels have been built in anticipation of the requirement to go at much slower speed,” he said.

Citations

1. https://bloom.bg/2wiv5a7 –Bloomberg
2. http://bit.ly/2uZ0r20 – OilPrice.com

The Good News Is . . .

• July retail sales climbed by 0.6%. The report not only exceeded expectations but also included sizable upward revisions. Leading the gain were non-store retailers, vehicle dealers, and building materials stores. The June retail sales numbers were also revised to a 0.3% gain from an initial 0.2% decline. And retail sales for May also was revised upward to unchanged from its initial -0.1%.reading. Retail sales are now better aligned with other indications on consumer spending, which are positive and in line with full employment. The upward revisions to June and May retail sales should be positive for second-quarter GDP revisions.

• Ssysco, Corp., a global leader in selling, marketing and distributing food products to restaurants, healthcare organizations, educational facilities, and lodging establishments, reported earnings of $0.72 per share, an increase of 12.5% over year-earlier earnings of $0.64 per share. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $14.4 billion, an increase of 5.7%. Management attributed the results to strong growth in its International Foodservices segment and improved operational efficiencies.

• Two institutional landlords, Invitation Homes, a rental business spun out of the private equity giant the Blackstone Group, and Starwood Waypoint Homes said they would combine to create an entity with about 82,000 homes in more than a dozen big markets. The planned merger is an indication that the housing market has recovered much of the ground it lost in the financial crisis. And as home prices rise in many areas, affordable housing, for deep-pocketed investors and young first-time buyers alike, is becoming harder to find. The deal could set the stage for other institutional investors to join forces. With fewer opportunities to buy homes at a discount, the keys to growth will be reducing operating costs, gaining market share and potentially increasing rent. Under the terms of the deal, each Starwood Waypoint share will be converted into 1.614 Invitation Homes shares.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2uGAOCG – Sysco Corp.
4. http://nyti.ms/2v8Y23N – NY Times Dealbook

Planning Tips

Guide to Understanding Reverse Mortgages as a Retirement Tool

If you own your own home and are at least 62 years of age, a reverse mortgage provides an opportunity to convert your home equity into cash. In the most basic terms, the reverse mortgage allows you to take out a loan against the equity in your home, but you do not have to repay the loan during your lifetime as long as you are living in the home and have not sold it. If you want to increase the amount of money available to fund your retirement, but do not like the idea of making payments on a loan, a reverse mortgage is an option worth considering. Below is a brief guide to help you better understand reverse mortgages as a retirement tool. Be sure to consult with your financial advisor to determine if a reverse mortgage is appropriate for your situation.

How Reverse Mortgages Work – With a reverse mortgage, a lender makes payments to the homeowner based on a percentage of the value in the home. When the homeowner dies or moves out of the property, one of three things can happen: (1) The homeowner or his/her heirs can sell the home to pay off the loan’ (2) the homeowner or heirs can refinance the existing loan to keep the home; or (3) the lender can be authorized to sell the home to settle the loan balance. While there are several types of reverse mortgages, including those offered by private lenders, they generally share the following features:

• Older homeowners are offered larger loan amounts than younger homeowners. More expensive homes qualify for larger loans.
• A reverse mortgage must be the primary debt against the house. Other lenders must be repaid or agree to subordinate their loans to the primary mortgage holder.
• Financing fees can be included in the cost of the loan.
• The lender can request repayment in the event that the homeowner fails to maintain the property, fails to keep the property insured, fails to pay its property taxes, declares bankruptcy, abandons the property, or commits fraud. The lender may also request repayment if the home is condemned or if the homeowner adds a new owner to the property’s title, sublets all or part of the property, changes the property’s zoning classification, or takes out additional loans against the property.

Types of Reverse Mortgage Loans – Reverse mortgages have been around since the 1960s, but the most common reverse mortgage is a federally-insured home equity conversion mortgage (HECM). These mortgages were first offered in 1989 and are provided by the U.S. Department of Housing and Urban Development (HUD). HECMs are the only reverse mortgages issued by the federal government, which limits the costs to borrowers and guarantees that lenders will meet the obligations. The primary drawback to HECMs is that the maximum loan amount is limited. Non-HECM reverse mortgages are available from a variety of lending institutions. The primary advantage of these reverse mortgages is that they offer loans in amounts that are higher than the HEMC limit. One of the drawbacks of non-HECM loans is that they are not federally insured and can be significantly more expensive than HECM loans.

Total Annual Loan Cost – Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of the home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance and the servicing fee. To assist borrowers in comparing mortgage costs, the federal Truth in Lending Act requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost (TALC). Use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.

Income Options – HECM reverse mortgages provide the widest variety of income-generating options, including lump-sum payouts, credit lines, monthly cash advances, or any combination of these. The credit line is perhaps the most interesting feature of an HECM loan because the amount of money available to the borrower increases over time by the amount of interest. Non-HECM loans offer fewer income options.

Interest Rates – The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. Borrowers have the option to select an interest rate that can change every year or one that can change every month. A yearly adjustable rate changes by the same rate as any increase or decrease in the one-year U.S. Treasury security rate. This annual adjustable rate is capped at 2% per year or 5% over the life of the loan. A monthly adjustable rate mortgage (ARM) begins with a lower interest rate than the ARM and adjusts each month. It can move up or down 10% over the life of the loan.

Citations

1. http://ti.me/1ZdYwjs – Time
2. http://bit.ly/2woQBtO – Forbes
3. http://bit.ly/2ade0Tz – Investopedia
4. http://bit.ly/2vQnE7T – AmericanAdvisoryGroup.com
5. http://on.mktw.net/2v97gx6 – MarketWatch.com