Six common money dilemmas solved
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The bottom line: Investing wins.
5. Buy a home or rent a home?
Even in today's crummy market, buying can beat renting if you're in for the long term.
You're relocating, or you're downsizing so you can harvest some real estate wealth. Do you buy right away or rent and wait out the housing bust? To get your answer, consider your monthly expenses, what you'd do with the profits from your old home if you didn't buy and your time horizon.
Strictly by the numbers: If you plan to stay put for at least a decade, buying wins, even if your monthly cash flow is more flush with renting. Over time, rising prices reward home ownership.
Let's say you're 65 and own a $350,000 home in Edison, N.J., mortgage-free. You're moving to the warmer climes of Albuquerque, where similar homes go for $175,000. After commissions and closing costs on both sales, you'll net $152,000. Buy a fixed immediate annuity with that money, and you and your spouse will get $10,500 a year for life.
What if you instead decided to rent in Albuquerque? With the $329,000 you'd clear on the sale of your New Jersey home, you could buy an annuity that pays about $23,000 a year. Even after spending $6,500 a year more in rent than you'd pay in property taxes and upkeep, you'd be ahead by $4,250 a year after taxes.
But if you had bought a home, you can cash in on any future price gains. If you stayed in the new house for 10 years, the price would have to increase by 3.3 percent a year for buying to beat renting (assuming you invest the extra money you would have spent on rent). That's a low bar considering that home prices nationally increased by an average of 6.4 percent a year between 1963 and 2005, according to the research firm Winans International.
But wait: What if housing prices keep tanking? No question, that could happen. That's why you need a long-time horizon to ride out the ups and downs. Between 1963 and 2005, the worst 10-year home-price return was 2.5 percent.
You do the math: Use the Rent vs. Buy calculator at Finance.cch.com.
Beyond the math: Owning has other benefits: the comfort of knowing that you'll never be forced to move by your landlord; the freedom to redo your kitchen in any way that strikes your fancy. On the other hand, renting can spare you the onerous upkeep that comes with maintaining a home.
The bottom line: Buying is best as long as you're confident you'll be staying put for several years.
6. Take Social Security early or late?
Most retirees should hold off four years for the bigger payout.
Collecting Social Security at age 62 cuts your annual benefit by about 25 percent compared with what you'd get if you waited until full retirement age — that's 66 if you were born from 1943 to 1959, or 67 if you were born in 1960 or later. To do the math, you need to consider whether you expect to live a long life.
Strictly by the numbers: Say you've just turned 62 and qualify for $17,280 a year now or $23,772 at 66 (in today's dollars). Start early and you'll have collected $69,120 by the time you reach 66. Wait, and higher payments will make up for those missed years in 10½ years.
If you live until at least 76½, postponing your benefits was worthwhile. The odds are in your favor: According to the Social Security Administration, the typical 62-year-old man should live until 80½, while the life expectancy for a 62-year-old woman is 83½.
But wait: When you collect a Social Security check at 62, that's $17,280 you won't have to withdraw from your IRA. Add in the extra tax-deferred growth (assuming 5 percent returns), and your break-even point moves out by three years to age 79½. Even then, odds are you'll live that long.
The math: Can get even more complicated if you're married. According to new research from Boston College's Center for Retirement Research, the best strategy for many couples is for the wife to take Social Security at 62 and the husband to wait. The reason is that men, on average, earn more and die younger. In this scenario, a wife would take her benefit at 62 and inherit her husband's larger check later. Finally, waiting to take Social Security assumes you can. Surveys show that 40 percent of retirees are forced into early retirement, through either downsizing or health issues.
You do the math: Get a more precise handle on your break-even age with the Social Security Administration's Quick Benefits calculator at ssa.gov/OACT/quickcalc/.
The bottom line: If you're healthy and don't need the cash, wait.
For more money and finance tips visit Money magazine's Web site.
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