Start Your Retirement Back Up Plan

by Karina Gafford

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I’m about to paint a really unpleasant money picture for you, but don’t worry, it gets better.
According to a study concluded by the Employee Benefit Research Institute last year, approximately 57-percent of all American adults have less than $25,000 total in savings and investments. Over the past few years, they have shown that the average working age family has less than $3,000 in retirement savings accounts. Given the military’s increasing draw downs and RIF boards, for younger service members, relying on a full-term career and a military pension seems increasingly like a pipe dream.
Given low retirement savings nationwide, I did not expect high rates of emergency savings. I was correct. According to the financial research blog LearnVest, it wasn’t too shocking to find that 64-percent of Americans do not have enough money in emergency savings to cover a mere $1,000 in emergency expenses. Further, less than 50-percent of those they surveyed among their blog readers reported that they were either building or had built an emergency fund to cover six months of expenses, the suggested amount required to make it through another economic downturn, loss of employment, or illness. Given that their readers show interest in a financial blog, and are thus probably more financially savvy than most, it’s likely that much less than 50-percent of all people nationwide are developing their emergency fund.
This is not a pretty money picture, my friends.

It’s time for a back-up plan.
Have you considered investing in real estate? Given our earlier assumption that those reading a financial blog are interested in financial investments, let’s go with that trend and assume that since you’re on a real estate blog, you’re interested in real estate investments. Real estate presents the tangible good of providing a home for your family to live in while you’re at a duty station. This is money you’d spend to live while you’re there anyway, so doesn’t it make sense to try to get the double benefit of living in your retirement savings? For this back-up solution to work, you’re considering the home you’ve just bought as a long-term investment strategy. This means that you’ll buy the home to live in for the duration of your duty station, and then you’re going to follow the best landlord practices you can find to rent out the home until the mortgage is paid off. When it’s paid off, then you can either sell the home and transfer the amount into a retirement savings account, such as an annuity, or continue to receive a monthly rental income as a cash flow supplement. Make sure to consult a tax advisor before making one of these two choices, though, so that you can avoid unpleasantries such as capital gains taxes.
Sound good? Okay. Moving on.
As a service member and military family, you have a phenomenal benefit in the form a VA Loan, a loan that can offer you a zero down payment opportunity to buy a home. If you’re PCS-ing, buying a home with a VA loan can often have far fewer upfront out-of-pocket expenses than moving into a rental property, as the rental will likely require a security deposit, first month’s rent, and sometimes even last month’s rent, too, in addition to pet fees and so forth. A VA loan won’t require a first payment until the following month. Don’t let the low upfront costs fool you, though. Homes require significant expenses that a renter wouldn’t have to shoulder, such as replacing water heaters, annual AC system maintenance, annual termite inspection and maintenance fees, and so on.
What if, however, you don’t want to buy a home with a VA loan? You may have one of these reasons:
a)     You’ve already used your VA loan.
b)     You aren’t buy a home that meets the minimum purchasing requirement for the second VA loan entitlement.
c)     You aren’t too keen on adding the VA funding fee to your closing costs, meaning that you’ll walk into your new home owing more than the home is worth. It’s akin to the same yucky feeling that the financially squeamish among us (okay, me) feel after driving a brand new car off the lot and realizing that the 100 feet you drove just cost you about 5-percent of the value of your car. Fortunately, houses generally appreciate while cars don’t, though the plucky few still holding onto homes bought in California, Detroit, Florida, and other areas where pre-recession home prices still have not rebounded may have wished they bought a car instead. Unless you’re screeching the tires of a Maserati out of that parking lot, depreciation on a car hurts your bank account a lot less than depreciation on your car.
d)     You’re trying to buy a condominium in an area that the VA has tagged as a bad investment for such properties (maybe you should thank them for their advice and consider another property?).
e)     The market in which you’re buying is too competitive for you to try to work a home buying deal with a VA loan.
f)      The VA just doesn’t like the property you’re buying.
Don’t be tempted to thwart your home buying plans just because the VA loan isn’t presenting a good option for you.
And yet, you still can’t afford a down payment. No money makes shopping a challenge; it makes home buying even more so.
However, you have options! Celebrate!
Many states offer down payment assistance programs for which a large number of military families would qualify.
According to MarketWatch, housing programs that do offer down payment assistance generally use calculations based on median incomes, but they also note that "it’s not unusual for those who make up to 120% of an area’s median income to qualify for a program." Meanwhile, BankRate notes that some programs offer prospective home buyers down payment assistance even when they earn more than 140% of the median income in an area. Both agree that these down payment assistance programs are not designed for low income families; instead, they’re for those earning steady, moderate incomes, making them perfect options for military families! Obviously (and this is a post-recession obviously), prospective candidates must have steady employment, good credit, and low debt to income ratios to qualify as good candidates. What they don’t need, however, is high savings for a down payment.
While some down payment assistance programs are available through individual lenders, such as Wells Fargo’s CityLIFT and NeighborhoodLIFT programs, most of these programs are state run. Let’s take a look at some of what the states have to offer:
  • Washington: This state is home to many bases, including Joint Base Lewis McChord and Everett Naval Station. Run by the Housing Finance Commission, the down payment assistance program in Washington operates as a second mortgage where the down payment functions as a loan; however, the loan only comes due upon the sale, transfer, non-occupancy, or refinancing of the home. These programs offer up to $10,000 in assistance for teachers, $15,000 for those with a disability, $45,000 for those buying within Seattle city limits (this does require a small down payment of 1-percent at closing), and $10,000 for those buying new construction. There is an additional program called Home Advantage that permits a 4-percent down payment assistance with 0-percent interest for 30 years, too. This last program is available to those earning up to $97,000 annually.
  • Illinois: This base is home to the quickly burgeoning Scott AFB as well as several smaller military installations. The Illinois Housing Authority Department operates the Welcome Home Illinois program. This program is available to both first time home buyers and those who have not owned a home within the past three years. This program offers $7,500 in down payment assistance to those buying a home on a 30-year fixed APR mortgage; however, home buyers must pay 1-percent of the loan amount at closing. Compared to 20-percent, 1-percent is a steal!
  • Texas: A large military state, Texas is home to Joint Base San Antonio, Dyess AFB, Fort Worth NAS, and many more installations. The Texas Department of Housing and Community Affairs offers a first time home buyers down payment assistance program for 30-year fixed APR mortgages, offering up to 5-percent of the loan amount as a second mortgage. Beginning in October 2012, the program started with $600 million available; it will only run until the funds are no longer available. As of August 2014, approximately $130 million remained in available funds, so if you’re planning on availing of this program, then act fast!
These are just a few of many state programs available. So, if you’re interested in buying a home with the help of a down payment assistance program, make sure to check with your state’s housing commission. A good local real estate professional should also be able to give you good guidance, too.
Before you celebrate your new retirement portfolio plan, you should keep this in mind: Before you buy a house, you should put aside some cash for the many emergencies that can arise with home ownership. Though setting aside cash to pay for plumbers, electricians, and yard work lacks the appeal of setting aside cash for something like a vacation, the vacation can wait, but the flooding in your basement cannot. You can find some tips for saving here.