Ask Mary Beth: Money Q & A

I read somewhere that retirees should consider renting (house, condo, apartment) rather than tying up funds that could be more profitably invested elsewhere. I also read that if someone felt they had to purchase a retirement home, they should do so with the very minimum required for a down payment. What is your opinion?

Mary Beth answers:
There is no easy answer to that question. It depends on your individual circumstances.

If you chose to stay in your current home and you have already paid off your mortgage, that is certainly a good way to reduce your day-to-day living costs in retirement. However, depending on your tax bracket, you could be losing a valuable mortgage interest deduction.

If you are thinking of relocating to a new retirement home, you have to consider your options.

Many people feel more comfortable buying their retirement homes outright with the proceeds from the sale of their previous home. But you should evaluate the rest of your financial situation before taking this big step.

You want to make sure you have adequate income and assets to meet your living expenses--including the possibility of paying for expensive long-term care as you get older. If you tie up all your money in your retirement home, you may not be able to meet future needs without selling your home.

The new tax law regarding capital gains treatment of the sale of a home may significantly affect the way retirees chose to finance their retirement homes. Until last May, a homeowner 55 or older could shield up to $125,000 in profits from the sale of his or her home from income taxes. But for some older homeowners who had watched their properties appreciate substantially over the years, that still left them with a sizeable profit subject to income taxes, which many chose to roll over into the purchase of a retirement home.

Now homeowners of any age can shield up to $500,000 of profit from the sale of their home. This will allow retirees to buy or rent the retirement home they want based on needs rather than tax policy. In some case, renting a home and investing the gain from the house sale may be their best bet.

Of course, there are some retirement communities that require a substantial up-front payment before moving in--and in some cases these payments include health care for life. If you opt for this type of arrangement--often called a "life care" or "continuing care retirement community"--make sure you and your legal/financial adviser read the contract thoroughly before signing.