Expensive Penny,

I reside within the Philadelphia suburbs. I lately retired as an orchestra instructor within the public faculty system. I will likely be on Medicare in December.

I bought my giant house and reside in a modest condo for $1,300 per 30 days lease. So I’m snug financially and simply making ends meet.

HOWEVER, I actually wish to purchase a small house. The actual property market is off the charts proper now and costs are insane. I might additionally use most of my financial savings and have a mortgage. My funds could be about the identical.

I’ve $200,000 in an IRA invested in shares and bonds, $14,000 in a Roth IRA that I simply opened final yr and $80,000 in financial savings. I’m debt-free and personal a brand-new automotive.

I’m amassing a month-to-month pension of $3,000 and $2,000 in Social Safety after taxes and Medicare supplemental funds. My pension plan is a defined-benefit plan with a $900,000 dying profit.

Are you able to supply any recommendation as as to if or not I can purchase a house?

-M.

Expensive M.,

You possibly can clearly afford to purchase a house.

Usually I’d begin the finger-wagging for those who advised me you wished to spend most of your financial savings for a house buy.

In case you have been nonetheless working, I’d ask you what would occur for those who lost your job. And for those who have been a retiree who depended totally on funding earnings, I’d warn you {that a} inventory market crash could temporarily wipe out a lot of your nest egg.

However you don’t have any debt and $5,000 of month-to-month after-tax earnings that’s assured for all times. Your earnings isn’t contingent on a wage or the inventory market’s efficiency. So you may afford to spend so much of your financial savings to purchase a house.

Plus rates of interest are historically low. That’s good for homebuyers, however not so good when you have $80,000 sitting in a financial savings account, the place it’s probably earning 1% at finest. It is smart to place a few of that cash into an asset that historical past tells us will most likely respect over time.

However I believe you may afford to buy a house — even for those who pay a barely inflated worth.

So take into consideration why you wish to purchase a house: Is that this an funding to you? Or do you wish to purchase a spot to make your individual for a lot of lengthy and glad retirement years?

I’m not saying it’s a must to select one or the opposite. The truth is, I wouldn’t recommend shopping for a house except you assume it is going to be each funding and place to reside.

However defining your objectives will show you how to make the correct determination. In case you’re shopping for a house as an funding, you’d wish to think about how you may maximize your ROI. In that case, in fact, you wouldn’t wish to purchase on the prime of the market.

However for those who’re shopping for a house to reside in that’s nicely inside your finances, it’s OK to purchase although the market appears sky excessive. Positive, it will nonetheless be good to attain a cut price worth, nevertheless it’s much less vital when your house buy isn’t primarily an funding.

Which brings me to the second query it’s essential to ask your self: What’s the worst factor that would occur right here?

If it’s purely an funding determination, the doomsday situation is that you simply purchase a home, the market crashes and also you’re left caught with a home you may’t promote.

Thoughts you, the housing market has remained sturdy even within the yr of coronavirus. It’s extremely unlikely that we’ll have a repeat of the 2008 housing crash. However we’re speaking concerning the worst doable end result right here, so please bear with me.

In case you strategy this as shopping for a spot to reside? Suppose the market crashes and your house loses worth. By shopping for on the market’s peak, possibly you’d miss out on the possibility to purchase extra home for much less. (In fact, there’s the flip likelihood that the market retains hovering and that this yr’s costs will appear to be a cut price a yr or two from now.)

Regardless, you’ll be paying $1,300 a month for housing whether or not you lease or purchase. You would possibly as nicely use that to construct fairness — and because it sounds such as you’ll make a considerable down payment, it doesn’t sound such as you’d want to fret about being underwater, even when house values fell.

I believe the largest problem you’ll face is sticking along with your $1,300 a month finances. If that’s the quantity you’re snug with, stand agency, even when which means shopping for an excellent smaller house than you’d deliberate to.

The great thing about your scenario is which you could afford to not make this a numbers sport. If a house will show you how to take pleasure in your hard-earned retirement much more, let the home searching start.

Robin Hartill is an authorized monetary planner and a senior editor at The Penny Hoarder. Ship your difficult cash inquiries to [email protected]

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