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By Christine Benz | 05-27-2010 10:00 AM

Real Estate Tips for Retirees

Retirement author Mark Miller on retirees' current real estate dilemmas and the role of reverse mortgages.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. How residential real estate fits into a retirement portfolio is a big part of retirement planning, but it's not something you'll read a lot about. Here today to discuss that topic is Mark Miller. Mark is a retirement specialist, and he's also the author of "The Hard Times Guide to Retirement Security." Mark, thank you for being here.

Mark Miller: Thank you, Christine.

Benz: Mark, you've got some great stuff in the book about residential real estate, but there are also some pretty gloomy statistics. We often think of retirees as coming into retirement with a fully paid off mortgage, but in reality that's not the case for many retirees.

Miller: Right. The two big problems going on in residential real estate for older Americans right now are one, we've seen this steep decline in values that we all know about, and it varies by different parts of the country, anywhere from 25 to even 50 percent in the worst-case scenarios. And that's not going to bounce back quickly, unlike stock portfolios, which have rebounded pretty nicely, actually, housing is going to be a much longer-term proposition.

The other problem is debt. The trend used to be that people did in fact tend to enter retirement with less debt or no mortgage debt, but that's reversed somewhat in the last five years, partly because of the housing bubble.

People were taking on bigger mortgages, doing expansions of their houses, and actually the data shows that there's been an upward trend in the amount of debt people are carrying into retirement.

Then, the third piece is that housing is by far the most important asset people have. We tend to think about retirement planning in the context of investing, and as important as that is, when you look at how assets really stack up, housing is for most Americans the single biggest asset.

It's a much more widely held asset across the country than stocks are, so it affects more people. It's down in the dumps. It's going to be down for quite a while.

Benz: It's not a liquid asset either, which is an issue and a particular problem for people who are underwater in their mortgages.

Miller: About a third of Boomers right now are underwater on mortgages ...

Benz: The 35 to 54 age group, I think that's what you cited in the book.

Miller: That's right. That's right.

Benz: For people who are underwater in their mortgages and starting to think about retirement, do you have any tips for them about how they can navigate?

Miller: It depends how far underwater you are. If you're a little bit underwater, I wouldn't worry too much about that. I'd really be thinking about debt elimination. One interesting fact around this discussion is that most people don't actually plan to move in retirement. The whole topic of moving for retirement gets discussed a lot, but most data shows that people stay where they are, and want to stay where they are. They want to age in place.

If you're going to stay in your home for quite a while, being a little underwater now is not that big of a deal. What you really want to think about is debt elimination so you own the home free and clear, because no matter what the value of the house is, interest cost is interest cost, so debt elimination can be really important.

The other thing that's worth thinking about is, "Is there some retrofitting you want to do on your home to make it appropriate as you age?"

Benz: You've got some stuff in the book about that.

Miller: Right, I have a whole section in there about the principles of universal design and ways you can make modifications to a home. Not many people have really started thinking about that who are pre-retirement, but it's a worthwhile thing to give some thought to.

Benz: To think about making the home safer for your retirement years.

Miller: Then the other thing about aging in place that I think is interesting is this nascent movement around creating community that is sensitive to aging populations. An interesting model for that is the Beacon Hill Village Community in Boston, which is what's called an intentional community that people form at a grassroots level to provide services and make the community more age sensitive. Those are starting to spring up with pretty good speed around the country, and they're very interesting.

Benz: You also tackle in the book reverse mortgages, which may be part of some retirees' tool kits. Any thoughts on the viability of reverse mortgages as a planning tool for retirees?

Miller: I would say it's not a good first resort. If people are house rich, cash poor it can be a reasonable course to pursue, but the reason I'm cautious about reverse mortgages is that they're very expensive. They can come with high fees, and the origination fees are high, so it's not an inexpensive way to finance something.

I would try to avoid using it for optional items. You don't want a reverse mortgage to fund travel, for example. But if you're sitting on an illiquid asset and you're in this situation of house rich, cash poor, it can be a life saver in some situations.

Benz: Thanks, Mark, for sharing your perspective on what is a really important issue for a lot of retirees.

Miller: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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