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What to know about real estate in retirement

Date posted:  10/5/15 09:45:00 AM Choosing to downsize is something many retiring homeowners consider.

Keeping detailed financial records should be a priority for all working Americans, but it's especially important for those preparing for retirement.

Lori Trawinski, director of banking and finance with AARP's Public Policy Institute, told the Los Angeles Times that those considering retirement - or currently retired - need to keep solid notes on their expenses and expected retirement income.

While some people have saved enough to live comfortably for the rest of their days, others understand it will be a struggle to get by. Many retirees who aren't sure where they will stand financially contemplate downsizing their homes for some extra cash.

"Everything depends on someone's personal financial situation," Trawinski said. "Having a mortgage or tapping into home equity is not, in and of itself, a bad thing."

Real estate and retirement
But there are a few things that retirees should avoid when considering real estate.

Wade Pfau, a professor of retirement income in the Financial and Retirement Planning Ph.D. program at The American College, told The Wall Street Journal that retiring homeowners with equity in their property might want to consider downsizing because it can turn some of their home equity into a liquid financial asset, which can be used for other retirement expenses.

Pfau said choosing to downsize also spurs homeowners to filter through their belongings, prompting them to get rid of certain items that are no longer needed or in use.

Larry Luxenberg, a managing partner with Lexington Avenue Capital Management, a financial advisory firm, often sees people in retirement drop the ball when it comes to real estate.

"Real estate is usually one of the biggest assets retirees have, but it's the area with the most emotional attachment - and a place where it's very easy to mess up," Luxenberg told MarketWatch.

Luxenberg gave recommendations to consider when downsizing. He said not every homeowner will come out ahead - from a cash standpoint - when they sell a large home and move into something smaller. But for retirees who do net some additional cash at closing, he urges those homeowners to invest that money wisely.

"People have a tendency to look at that as found money," said Luxenberg, noting that it's very easy for them to go out and spend that money quickly.

Scott Bishop, director of financial planning with STA Wealth Advisors, told MarketWatch that couples who come out ahead from a downsize should consider using those funds first for retirement expenses. He said this allows retirement funds to continue to grow for a greater period of time.

Think about a mortgage
Thomas Scanlon, an adviser with Raymond James in Manchester, Connecticut, told MarketWatch that taking out a mortgage during retirement is not the best idea for every person. Rather, it should be evaluated on a case-by-case basis.

"If someone is 50 years old, he'd have the mortgage until he's 80," he said.

But mortgage loan interest rates are still favorable in the current economic climate and homeowners can deduct mortgage interest when filing their income taxes, which makes taking out a mortgage more attractive.

According to the Consumer Financial Protection Bureau, homeowners preparing for retirement that still carry a mortgage should try to set a goal for a specific period of time when they can pay off all of their debt.

The agency also gave a recommendation for retirees considering a downsize: to consider a 10- to 15-year loan instead of a mortgage covering 30 years.

While homeowners who choose to take out a short-term mortgage will have higher monthly payments, they will be less likely to carry the burden of a mortgage deep into their retirement.