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Current considerations most planners ignore

One of the cardinal rules of financial planning for myself has been: listen to the people who have been there. So when my fiancé’s father said: “You sure don’t want a mortgage in retirement,” it got me thinking. My lady and I are nearing retirement age. We both have legacy homes from our previous lives, which we are ready to vacate and sell. So, now what do we do? How do we think about real estate? What are the risks and possible rewards, and how do we want it to fit into our lives?

Normal financial planning would make this easy, but as I outlined in a separate article, three risks are hard to assess these days — COVID, climate, and the risk of political dictatorship. In America, no one has ever faced these risks in their retirement planning. I realized that my fiancé’s father is a wise older gentleman, but his advice might not hold since he has not faced the risks we are confronting. In other words, he isn’t a person who has been here before because no one has been here before.

So, we’re on our own.

Real estate has a unique mix of considerations. On one hand, it is about investment and still may be the biggest investment you make and hold. Therefore, decisions can have a HUGE impact on your wealth as you live out your years on the planet. On the other hand, real estate is also a major determinant of lifestyle — where you have a home affects your family relationships, social relationships, lifestyle, and financial well-being.

In this way, real estate decisions are unique and different from those of stocks, 401ks, REITs, and other investment vehicles. Those all affect your wealth, and so impact lifestyle. But buying Microsoft stock as opposed to US Steel stock does not change your proximity to your grandchildren. They don’t require maintenance and upkeep. And you don’t need an extra few thousand dollars lying around in case the dishwasher needs replacement.

Family, social needs, and lifestyle considerations profoundly impact real estate decisions — everyone considers those factors. But retirees should also consider the three risks I outlined earlier: COVID, climate, and dictatorship. Here are some of the considerations we have been making as we go through this process.

COVID’s Impact on Your Retirement Real Estate Decision

At the time of this writing, COVID presents two primary concerns about real estate. No one knows how the virus is going to mutate or how it will develop. In the worst case, future mutations are more contagious, more lethal, and can break through the current vaccines. Such a situation would resemble the early days of the pandemic when no one really knew what to expect or how to protect themselves. Social distancing and isolation were the best protection, and the virus went haywire in places that forced close social interactions — congregate living, assisted living, apartments, and condominiums.

The first consideration, then, regards congregate living. We are healthy and active so assisted living is out of the question.

But what about condominiums? Condos seem like a great idea because they are maintenance-free, somewhat social, easy to close up and leave. In large buildings, everything is inside and very convenient. Because social distancing was impossible inside an elevator, however, elevator lines grew to 2–3 hours in some condo buildings during the pandemic. We compared the convenience of having everything inside to the risk of getting sick with COVID. Suddenly, condominiums didn’t look so attractive.

Because of this perceived risk, many people avoided condominiums during the pandemic. The reduction ins demand created some good buying opportunities, which persist today. People who can buy, hold, and not use a condo could make some great money in this area, but that’s not us. If we buy a condo, we intend to use it. And the last thing we want in retirement is to sink a bunch of cash or carry a mortgage on a place we can’t use. Given our current situation, we intend to avoid condominiums as a real estate purchase.

As a second consideration, COVID affects travel between the places we choose to own. In the worst-case COVID scenario, we do not want a home in a location that requires a flight to get there. Although the airlines figured things out with COVID fairly quickly and have learned to keep flyers safe, new strains with new characteristics will also go through a learning phase, if they occur.

Beyond flight, the emergence of new COVID strains may shut down borders, as just happened with Omicron. If you own real estate in a different country and the border shuts down, you can’t go to your home at all. If you own, that becomes a lot of money tied up in an unusable asset. Not good.

I’m not sure where we will come down on this decision. We know other retirees who stay within the US when they head south for winter primarily because they can drive and avoid airplanes. As we consider this, we question ourselves: Are we being too doomsday-ish? Too pessimistic? Are we limiting our options more than we should? Or are we protecting our resources and making sure that whatever we have will continue to last through these outstanding retirement years? At this point, we tend toward a very high level of caution on this one since the direction of the pandemic is so unknown and unpredictable.

Climate Risk

Because the impact of climate change varies geographically, the potential for change is critical to any real estate investment. Miami Beach, Tucson, central California, and northern Minnesota all have different impacts. As we consider this, I am breaking it down into three categories of climate risk and impacts: Known impacts, probable risks, and unpredictable risks.

Known Climate Impacts

There are places on earth where the impacts of climate change are well known and predictable. For example, scientists can predict sea-level rise along coastal zones and among island nations. From Antarctica to Greenland, glaciers and ice coverage have disappeared. Alaska is thawing its permafrost, and glaciers are shrinking from the northern edge of Alaska down the mountain chain extending from British Columbia to New Mexico. Similar effects are occurring in Scandinavia, Siberia, Mongolia, and Tibet.

Some of these places are far-flung, but retirees planning retirement real estate investments must consider the impacts. I don’t want to be the owner of a condo on South Beach whose value declines because the basement is full of seawater from a rising sea level. I don’t want to be downstream from a glacier that could have a sudden meltdown and flood the river, no matter how beautiful the retirement ranch for sale in that place might be.

The images I just outlined are stark, but that’s not the real risk to retirees. The real risk is that you buy when no one is thinking of these things. For example, most owners of condos in South Beach probably did not consider sea-level rise when appraising their decision. Sea-level rise wasn’t a serious consideration at the time. But eventually, it becomes common knowledge that sea-level rise will occur. That’s when the market tanks. No one wants to buy real estate that is perceived to face such a threat. The market tanks, you don’t want to be there either, and you can’t get your investment out of the property. That is not where you want to be when you are retired.

Known risks are just that — they are known. Science has provided the information. Sophisticated real estate professionals take it into account. Insurance companies increase premiums or refuse to underwrite, corporations face a new expense structure, and the Pentagon assesses its bases and their readiness. As retirees, we can do the same thing. Just think through the known risks and determine what you can tolerate.

Probable Climate Risks

Probable risks are likely to occur but have a lower level of certainty than known outcomes. Sea-level rise appears to be certain and local in its effect. But increased fire risk, while a virtual certainty, could happen anywhere at almost anytime. Last summer, there were big fires in particular parts of California, British Columbia, and Minnesota, to name a few. Risks increase in these and other areas, but they are risks, not certainties. If you live in the northern Minnesota forests, for example, you can know that the risk of fire is increasing in the forest, but you cannot know specifically if the risk is higher in one specific location versus another. In Miami, you can move away from low and coastal areas to avoid sea-level rise. But in Minnesota, that increased fire risk applies to the entire forest — approximately the northern half of the state — and if you look at one house versus another in that area, they all face approximately the same level of risk.

Here’s another example from the upper Midwest: Many people have noticed an increase in weeds in the thousands of lakes across Minnesota and Wisconsin. Could this be due to the warming water conditions? Will there be a difference in the quality of a lake between deep, cold lakes and shallow, warm lakes? There are advantages and disadvantages to living on a lake, but with 25,000 lakes to choose from in these two states, the buyer confronts a similar issue — is there any way to delineate one lake’s risk from another lake’s risk?

Probable climate risk requires the retiree to play the odds because the eventuality is not known. If your income has limited upside, a hit on the value of your biggest investment could be devastating.

Unknown Climate Risks

Finally, there are the most unpredictable issues of all — future human decisions. Some impacts of climate change, whether urban and developed or rural and wild, are nearly certain. One can plan for them. How people will react is a whole different matter.

In the southwestern United States, approximately 40 million people are dependent on water from the Colorado River. Climate change appears to be making that river dry up. Man-made reservoirs on the river are the lowest they have ever been, and the changing climate does not appear to be positive for replenishing them.

Planful retirees may want to avoid this area, but there are additional risks. What will happen? When will it happen? Where will it happen?

It is impossible to conceive that people will just stay in the southwest without water to drink, bathe, and clean their kitchens. We need water to live. At worst, people will have no water to drink and die. At best, quality of life will be affected by conservation measures. Even if there can be a way to make enough water, the place will become less desirable, and many people, maybe millions of people, will leave. When will that happen? Where will they go? No one knows.

Wherever that migration pattern leads them, there will be an enormous impact. Mass movements of people always create instabilities and uncertainties. Real estate values in the exodus area will plummet, and values in destinations will increase — if the exodus is orderly. If a sudden mass migration occurs, the rise of refugee camps becomes inevitable, and the places where those occur will also see real estate values drop.

These responses are the mass decisions of millions of people. The government will also act. While the southwest is completely drying up, 10% of the world’s fresh water is in Lake Superior. Does anyone think policymakers will not notice? The US government built a 242-mile aqueduct to divert the Colorado River to Los Angeles in 1933. It seems inevitable that the government will build a pipeline from Lake Superior to the southwest if climate change continues unabated. Whose land will it go through? When will it happen? This will be a government decision, and government decisions are highly unpredictable — both the timing of a decision and the nature of it.

Policy decisions and individual human decisions will impact many places, and the two may affect one another. Local policy, local economic conditions, and people’s perceived needs will all come into play. States or cities may experience enhanced diversity with new residents, for example, or they may be overwhelmed with too many people and too much change. Either way can affect local real estate values up or down.

Catastrophe: An American Dictatorship and Your Real Estate Investment

In many ways, this is the biggest, most unpredictable, and thankfully least likely risk to confront, but you should consider it given our current political climate. When 10% of one political party and 30% of the other party (18% of all Americans overall) agree with the statement that violence may be necessary to save the country, you can no longer dismiss it out of hand. We may move into a major destabilization of our political system.

The specific impact is difficult to determine, as it depends very much on how you sit vis-à-vis the new dictator and his or her politics. Over time, Hitler stripped Jews of all their property. Stalin collectivized the farms. Many political opponents had their property seized. Property rights, in other words, can go right out the window. All dictatorships have one arch enemy, and that is western liberal values and principles. One of the primary principles of liberalism is private property — a principle that underlies personal freedom and capitalism. Dictatorships cannot accept either one.

Retirees considering this risk must consider the possibility and expense of owning real estate in a foreign land. If your property is taken from you here, where will you live? You may want to vacate it and leave, due to the risk that government may seize the property, but you will be safe somewhere else while the dictatorship rides out its years in power. Sadly, for retirees, that could turn out to be the remaining years of your life, so choosing carefully is important. And, as discussed earlier, COVID could have the opposite effect.

The other consideration in the case of dictatorship is your financial relationship to the property. Many retirees gravitate toward paying off their mortgages. Under normal circumstances, this can be wise, and if you can afford it, it can provide additional stability to your financial life.

However, if you own real estate, owe nothing on it, and must abandon it, you have put at risk every dollar of equity you used to hold it. Your departure walks away from all of it. On the other hand, if you still owe 80% and leave the country, there’s a good chance you only lose the 20% equity. If you default on the loan, the bank takes the property and will dispose of it. That’s not great, but it is probably better than losing all your equity in a worst-case scenario. None of this will happen unless the country is falling apart. But if we have a catastrophe, it may be advantageous to have conserved cash rather than eliminated debt.

Conclusion

We all have to make our own decisions based on our assessments of risks. I share this essay to illustrate a few things all retirees should consider, but you will do so or not at your discretion. I am very much in the process of making these decisions, so I don’t have a conclusion on how I come down on the real estate we will hold.

Anthony Signorelli

Ideas on Men, #MeToo, and Masculinity to help men be better men.

Exploring the future of digitalized, postcapitalist society (i.e., climate change, green energy, new economy, social changes, cryptocurrency)

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