However, at a recent brunch, one of my friends mentioned she had purchased a home for her brother in Georgia for the tune of $35,000 about 10 years ago. While I am fully aware there are far more affordable places to live in the country than Southern California, the chat with my friend sparked my curiosity. Intrigued, I did some research to find that homes in that area go for about $60,000.
So what if I were to uproot and purchase a home in a less-expensive part of the US? “Wanting to buy a house later in life is common for single women who are older, and have a hard time because of the time and maintenance that goes into homeownership,” says Jovan Johnson, a certified financial planner and cofounder of Piece of Wealth Planning, a holistic, fee-only financial advisory firm based in Atlanta.
Johnson had seven steps to take if I were to go this route:
1. Decide if you’re willing to relocate
First, Johnson suggests being honest with yourself and deciding whether you’re willing to relocate to a less-expensive part of the country. In my case, that would be tough, as my social network and most of my family live in Southern California. Plus, I’ve never lived elsewhere, so it would be a bit of an adjustment to acclimate to different weather and environs.
2. Consider moving to a state with no income taxes
To save money, you can look into moving into a state with no state income taxes. Currently, there are nine states where you don’t have to pay any state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
“And if retirement is, let’s say five to 10 years out, if you move to that no-tax state, you can strongly argue residency,” Johnson says, which could potentially get you access to your retirement plan distributions tax-free. “Ten years is a good benchmark to say, ‘Okay, I’ve been in a state for 10 years,'” he continues. “You can prove that you didn’t just move there to avoid taxes.”
3. Run your numbers for retirement
Before you decide on whether buying a home for your retirement is a wise move financially, Johnson recommends running some numbers to figure out if you have enough money to comfortably retire. From there, you can dial in on your budget.
To do this, figure out what you think you’ll need to live in retirement. Then, see how much you currently have stashed in your retirement savings. You’ll also want to make sure you’re on track. This might be funds in a 401(k), IRA, and HSA funds you’re using to invest with or to save for eligible healthcare expenses in your Golden Years.
Typically, you’ll need anywhere from 55% to 80% of the income in your working years during retirement. In turn, a good rule of thumb is to aim to save at least 15% of your pre-tax income.
4. Factor in additional numbers for retirement
Besides having enough for major living expenses such as your housing, you’ll also need a medical fund, and to build in time for travel and fun with your family. “Your main expenses should carry over, except for little tweaks here and there,” says Johnson. “For instance, you may spend more on travel versus spending more on things for work.”
He continues: “Once you run a projection, and think you have enough saved for retirement, you can dial down all these contributions to your 401(k), and reallocate that to saving toward a home. Or you might notice you have an abundance in your retirement accounts. And if you’re nearing the age where you can take out distributions without penalty, which is 59 , you might want to consider pulling out a lump sum.”
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5. Try to buy your home while you’re still working
If you plan on taking out a mortgage to buy your house, ideally, you’ll want to do so while you’re still working. That’s because it would boost your odds of qualifying for a mortgage in the first place, explains Johnson.
It is possible to get a mortgage with only Social Security income in retirement. If you wait until you’re retired to apply for a mortgage, and get approved for a home loan, you might qualify for a lower amount. That’s because lenders will likely see you as more risky. So if you can, save for a down payment and get a house during your working years.
6. Consider using funds from your Roth IRA to put toward a down payment
Roth IRAs can also be a powerful tool to fund a down payment on your first house, Johnson points out. You can take out up to $10,000, without getting hit with taxes or an early withdrawal penalty if you’re younger than 59 . Unlike borrowing against your 401(k), you don’t need to pay it back. To qualify, you’ll need to meet the requirements:
Roth IRA has to be open for at least five years.
Be a first-time homebuyer (per the IRS, this means you haven’t bought a home in the last two years).
That being said, note the disadvantages: As you’re tapping into your retirement, you’ll have less stashed away in your retirement savings. Plus, you’ll miss out on my earnings from the compound interest. So it might be a better idea if you’re younger and have time to catch up on stashing cash for your nest egg.
7. Run a tax analysis to figure out how to manage your down payment
If you do plan on pulling funds from retirement or investment accounts to put toward a down payment, you’ll want to be sensitive to the tax implications, Johnson says.
For example, if you’re getting taxed when you take out withdrawals from these accounts, how much will you be taxed? While it could be a good route to take to save for a house to live in while you retire, at the end of the day you’re still needing to mind the cost of housing, whether it’s renting or being a homeowner, you’ll need to take steps now and plan accordingly.
“If you’re still on the fence of whether you should rent forever or get a house, if you can match the housing expenses with your rent — or be less than your rent — then it could make sense,” says Johnson.