What About My House? (A Soon to be Retiree’s Dilemma)

June 24, 2011

I met with someone who is preparing to retire in the next year, and we started talking about what a day in his new-styled life would look like. I asked what I thought was a simple question, “Are you planning to stay in your house, move somewhere warmer (he lives in New England), or stay local and downsize?” It turns out, the question wasn’t so simple. Here’s why:

About 10 years ago his youngest child (of 4) graduated from college, and he and his wife paid for all four educations through savings and taking out home equity loans and mortgage refinancing. So, while he’s ready to retire, he has another 10-12 years left on his mortgage. The house is a large 5-bedroom with a big yard, which was great for raising kids, but not so great for a retired couple living without kids. The heating/cooling costs, property taxes, maintenance and upkeep costs and mortgage payments eat up a significant chunk of their monthly income. The value of the home has fallen from $500,000 to $375,000 since the last refinance, so a lot of the equity in the home has disappeared. When he started looking at retirement income 10 years ago, one of the components he thought he would have was income from a reverse mortgage. Guess what? That anticipated income stream won’t work right now with very little equity and a substantial mortgage. OK, how does that impact things?

His original intent was to stay in the house for a few years after retirement, while fixing it up a bit (raising 4 kids in the house took a little toll on things and he never had the time to fix everything the kids and time wore down) and selling it. After selling it, he was going to use the gains and his equity to downsize and pay cash for a smaller place. With the the smaller place he was going to get a reverse mortgage to generate income over and above his pension and Social Security. With those income sources, have an absolute blast in retirement. His house going up in price every year was a central part of his plan, and now he isn’t sure what to do.

He sees a few options:

Stay where he is and continue to pay down the mortgage at the current rate. Try to wait out the downturn in housing prices. The advantage, he has considered it “home” for so long that it just seems like that’s where he should be. The disadvantage, it costs A LOT to continue to live there so he will have to scale back his plans on how to live during retirement. And, he may have to work a few extra years to build a bigger asset base from which to draw down during retirement.
Use most of his savings (outside of retirement) to pay down the mortgage and then refinance at today’s low rates. The advantage is a lower ongoing cost of mortgage – making the monthly budget easier to meet, and staying in his “home.” The negative is that it would take most of his non-retirement savings to make an impact and he would have few available dollars for retirement.
Downsize locally. A lower priced home with lower taxes and lower upkeep sounds good, but the lower priced homes haven’t lost the same percentage of value as the higher priced home he would sell. So, his dollar wouldn’t go as far, at least that’s his opinion.
Sell the New England home and move to someplace like Arizona or Florida where values have fallen further, and get a great deal on a great house in a place where he won’t have to own a snow shovel. Upside: more “bang for the buck” and lower monthly fixed costs. Downside: moving away from the “family home” into a brand new area can be a little bit unsettling.
Rent. Get away from property taxes, upkeep, and mortgage interest. Sell a bunch of your stuff and downsize not just your home, but your life. Simplify. Sign a one year lease and if you don’t love the place, it’s only a year commitment. You can always move to another place nearby or halfway across the country. The downside: the rent payments will never stop, it will never be fully paid off, so housing costs will be a “forever” thing.

He isn’t sure what his game plan is, but we talked through each of the options and the positives and negatives of each choice. The real lesson we learned in talking through these options is that his monthly cost of living can vary tremendously based on what path he takes. If you were giving him your $.02, which path would tell him to take? What would you do? Why?

Because of the current state of the real estate market and the overall economy, he isn’t the only person facing this decision. When looking at income needs in retirement, what percent of income do you want consumed by your housing costs? For how long? These are all questions that soon-to-be-retired people must face very soon. He and his wife are taking a vacation and plan to have a long conversation about this topic. When he lets me know what they decide, and why, I’ll update this to let you know what happened. Till then, let me know what your plans are and what else he might want to consider. For the comment that I find most interesting, I will give you a free one-year subscription to this blog. 🙂