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SOct 31, 2012

Buying Your Retirement Home Early Can Be a Good Idea

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Q. My wife and I would like to retire in 3 to 5 years (I am 60 and she is 56). We are wondering if we can buy a home in Corpus Christi. We would then rent out the home, either short term or long term, with the goal of eventually moving to the area and making this our retirement home.

We stayed in this home during our summer vacation. We really enjoyed the house and location. In the process we got to know the owners (a retired couple with 3 rentals in the area) and it turns out they would like to sell the house we rented to buy an additional beach property (this house is not on the beach, but inland about 15 minutes from the beach). ??

The selling price is $130,000. It is very well maintained, fully furnished and is fairly priced based on area comps. They also have a guest list of previous renters/vacationers via VRBO that they would share (the home has been a rental for about a year). My main concern is that we live in Dallas. They live in the area and perform the major property management duties. If we did buy it, we would look for a long-term rental versus short-term vacationers. We would also look for a reliable property management company.

We have modest assets: 401(k), $260,000; IRA's, $80,000; emergency fund, $60,000. Our home is paid for and worth about $300,000. ??I make $125,000 per year and my wife about $20,000. We save about 25 percent of our income and?the only debt we have is $14,000 on a new Prius.

Do you think buying this house in Corpus to diversify and eventually relocate is a good idea? —J.R., Dallas, TX

A. Yes, I do. The basic facts here suggest that you are hoping to do what many retirees do— move from an expensive area to a less expensive area and a less expensive house. Moving from a $300,000 house to a $130,000 house will liberate $170,000 to use as income producing financial assets while reducing your shelter expenses at the same time. That's a big and positive lever on your retirement living expenses.

Buying the house now may pinch your savings rate unless the rents cover the operating expenses (unlikely), but the deal is probably a good bet, as long as you understand that it is a bet and you'll need to tend your other resources very carefully to have enough assets to retire. If the numbers don't work in 5 years—when your wife will still be under minimum age to collect Social Security— you can finesse things quite a bit by working longer. You won't be alone.

If a mortgage on the house is hard to come by, you can use part of your emergency fund for the down payment and finance the rest with a home equity credit line on your primary home, but a first mortgage on the home you are purchasing would be better.

Q. I will be receiving a pension of about $24,000 a year soon. ?How much do I need to have invested (say in a mutual fund) to counteract?the effects of inflation over time on that $24,000? I have other investments and will have Social Security, but I'd like to know how much to set aside to keep the buying power of my $24,000?the same over time. —S.S., Austin, TX

A. Inflation-adjusted life annuities are rare. When they were more available they cost roughly 50 percent more than a fixed life annuity for the same starting payment. So your inflation compensation fund would need to be about half of the value of your $24,000 annuity. That value will depend on your age, so I suggest you look at current life annuity offers and terms on www.immediateannuities.com.

Recently, a fixed single life annuity for a 65 year old man required a payment of $345,399 to provide a fixed lifetime income of $2,000 a month. That's a payout rate equal to 6.95 percent of your payment. That suggests you would need a side fund of about $172,000 (one-half of that $345,000 cost) to compensate for future inflation. The operative word here is “about.”

This "do-it-yourself" inflation adjusted annuity would not have an insurance company guarantee backing. It would, however, also create the possibility of increases in monthly income slightly in excess of inflation and the possibility of leaving an estate. The operative word here is "possibility."