Housing costs and related household expenses make up the single largest spending category for Americans over fifty, a recent study by Employee Benefit Research Institute reports. This has many pre-retirees concerned because for most retirees’, their income declines or is fixed but certainly doesn’t grow. At the same time, expenses just keep on coming. While household expenses eventually decline with age as Americans reach their mid–eighties, health care costs increase substantially for that age group, wiping out any advantage of the cost savings.
For baby boomers who want to retire before they are too old to enjoy it, the answer may be to reduce housing costs—their biggest expense—now. I know this plan well as my husband and I are attempting to execute it ourselves. There are pros and cons – costs and benefits to be weighed. We recently moved from California, where we lived in a five bedroom home, to a much smaller three bedroom condo just west of Salt Lake City, Utah where we’d like to eventually retire. We plan to pay it off in the next twelve years or sooner so when I am ready to retire, our housing cost will be minimal. That’s the plan.
The reality is condo living has its pros and cons. I personally love having close neighbors who we can give a quick call and run down to borrow something from (like my neighbor did just last night). With neighbors close by, we can help each other out and for those who choose, have a busy social life. The double edge of that sword is we have neighbors close by — playing music, running around upstairs, parking in our driveway, letting their dogs off the leash, etc. It’s a different life. My husband’s dream is a log cabin in the woods – aka Jeremiah Johnson. We are far from that here. A cost/benefit analysis needs to be made and in our case, every time we weigh the pros and cons, we come back to loving the condo lifestyle.
Planning for reduced housing costs is vital for retirees. We’ll explore strategies and each one requires some kind of sacrifice but also produces some distinct advantages. Do your own cost/benefit analysis on the following options and consider how to reduce the largest expenditure when you are over 50.
Move to a place that is cheaper. Scour the “best places to retire lists” for inexpensive but high quality-of-life retirement cities. Consider places to retire that either have no state income tax, which are Alaska, Florida, New Hampshire, Tennessee, South Dakota, Washington, Wyoming, Texas and Nevada. Review Forbes list of states with the best tax climates for retirees, which my new home state of Utah made. Utah has a state income tax but in general has a favorable tax policy – it’s much cheaper for us to live here than in California.
Buy your retirement home now. Janet Novack writes in her blog, Warren Buffett’s Advice: Buy Your Retirement Home in the Sun Belt Now, with home prices still low and interest rates bouncing along the bottom of historical lows also. Warren Buffett’s secretary followed his advice. She and her husband are reported as recently purchasing a 2100 square foot home in Arizona with a pool and a putting green for $144,000 that was worth $318,000 in December of 2005. This strategy makes sense. Why wait until the prices go up?
The benefit is obvious – purchase your dream retirement home at a rock bottom price. For people who aren’t able to telecommute or aren’t able to move, the cost of owning two properties is a factor. There are ways to mitigate it by renting the property until you retire. Although the hassle factor might be high, the rent may make it worth it. The other thing is to sacrifice and maintain two homes until you are able to retire and sell. Vacation there in the meantime or open it up to friends and family to use and enjoy.
Seriously consider retiring abroad. You may want to join the ranks of the expatriates and retire to a different kind of sunbelt — one south of the border. Liz Davidson wrote in her blog, The Great Retiree Migration is not so Far Fetched, the warmer climates of Panama, Mexico, and Costa Rica are a big draw to Americans. The favorable climates, access to good health care and ease of communicating with friends and family with today’s instant technology make retiring abroad a viable option. The big downside is the distance for family members and friends to visit but the savings in the costs of housing and health care (the two major ones) may be enough to pay for frequent flights home or for visitors.
Move in with your kids. Well, maybe not moving in but consider a “parents-in-law” quarter on their property or attached to the house. This could be the best of both worlds for a parent or grandparent – closeness to loved ones and the autonomy of having their own place. It used to be quite common in the US to have elderly parents living with their children and having three generations in one household. There are certainly benefits to the arrangement with reduced housing costs for the parents, ease of access to visits and caring for each other. If there are grandchildren, certainly having a close relationship with the grandparents can enhance their lives in many ways. The downside is possible loss of autonomy and dependence on adult children. Whether this strategy is viable or not depends on the relationship and compatibility of the parties involved.
Downsize now instead of later. Smaller homes are becoming more popular. That doesn’t mean you need to live in an apartment with 175 square feet of living space. US Census data showed a trend in average housing size increase from 983 square feet in 1950 to 2349 in 2004. Since 2008, this trend has reversed and more and more Americans are re-thinking larger houses for smaller ones. A 2010 survey by Trulia-Harris showed only 9% felt their ideal home was 3200 square feet with more opting for 1400 – 2600 square feet. Smaller houses are cheaper to heat and cool, easier to clean, and may have reduced property taxes also. If you are thinking about downsizing at retirement, why wait? Unless you have a large family still living at home, consider fast forwarding your move date.
Staying put? Pay off your mortgage. Knowing housing is the largest expense for Americans fifty and older, set up your payment plan to pay off your mortgage sooner to reduce that cost. Use an amortization calculator (like this one) to determine when your mortgage will be paid off. Experiment with the calculator to see the effect of extra monthly principal payments or an additional lump sum on your payoff date.
Make major house repairs now or set aside funds for that purpose. Before you retire and while you have a higher income, make major home repairs such as a new roof, a kitchen remodel, and upgrading your heating or cooling units. Replace any appliances that you’ve had for 18 years and have a 20 year life-cycle or set aside money to do so.
A positive side effect of moving or downsizing is getting rid of the things accumulated over a lifetime in one home. When my husband and I moved, we found boxes of items in our closets that we’d never opened since the previous move ten years before. Those were easy items to give away or sell. We also found some seemingly lost treasures such as my grandmother’s binder of genealogy. She had traced our family tree back to the revolutionary war days and it was wonderful to find her handwritten pages. Moving forward with cost reduction strategies is worth the effort in that any step you take is a positive one — you also never know what adventures await in your new state of residence or what special treasures lie hidden in your own home today.