January 11, 2015 — We baby boomers are conflicted about retirement in so many ways. For example we spend a lot of time planning to find a place where we can pursue our dreams, yet fail to consider how those dreams might change in 20 years. We worry about our ability to have enough money to live comfortably in retirement, but overlook how much we are spending on the home we live in now. We recently came across a pair of articles that explored the latter phenomenon in depth: one from the Demand Institute (Baby Boomers and Their Homes), and MarketWatch (In Retirement, A Big House Can Lead to the Poor House). See end for links to these articles.
A Big Nut to Cover
The MarketWatch article by Jonathan Clements lays out in dramatic fashion just how much an expensive house can cost a retiree. The more expensive it is, the more it will cost you in interest (if you have a mortgage), maintenance, insurance, energy, and property taxes. So as the value of the home goes up, you have less money for a comfortable retirement.
Take the example of a home that costs $20,000 a year in property taxes, insurance, energy, and occasional maintenance. Assuming a 4% withdrawal rate, that means you need retirement savings of $500,000 just to cover your living expenses. Since those costs are directly proportional to the value of your home, as its value goes up so does the amount of retirement savings or income needed to pay for it. However, if you could downsize to a more efficient home and cut those costs to $15,000, you would “only” need savings of $375,000 to cover that nut.
Charles Farrell, chief executive of Denver’s Northstar Investment Advisors and author of “Your Money Ratios”, who is quoted in the article, illustrated the somewhat twisted thinking that people have about their homes. According to Farrell, they can’t seem to get out of their heads the idea that homes are a great investment; whereas once you are retired, most of the times they are a just a “money pit”.
Conflicted about size and cost
The Demand Institute explored the many kinds of conflicts that boomers when it comes to thinking about our next homes. Here are some of their key findings, along with the attendant conflicts:
Finding: Most boomers want to retire where they live now, usually called retiring in place
Conflict: Their homes aren’t all that age-friendly: only about half are single story or low maintenance, and only about one-quarter are considered accessible.
Finding: Boomers intend to upgrade the homes they intend to live in
Conflict: The upgrades they intend to make are mostly to increase their value by upgrading kitchens and baths, improving energy efficiency, and making repairs. Spending to make their homes low maintenance or for aging/health needs is lower on the needs hierarchy, although it shouldn’t be.
Finding: About one-third of boomers are planning to move in retirement, with the common wisdom that they will tend to want to downsize when they do so
Conflict: The study found that almost half (46%) intend to upsize (buy a bigger home or one that is higher value of the same size) when they move. Surprisingly, some 32% intend to spend more on their next home than the one they are in now.
Finding: The overwhelming majority of boomers (75%) who intend to move are looking for a single story home
Conflict: But most of these people also want a yard or garden, which means higher maintenance.
Finding: (this is from other research) About half of baby boomers are concerned about having enough money for a comfortable retirement
Conflict: Of those baby boomers who intend to buy a new home, about half expect to have a mortgage on it.
Boomers who are concerned about having enough money for retirement should first look at how they can save money on shelter. Downsizing to a smaller and more efficient home, or even renting, might make the difference between a comfortable retirement and one that is stressed.
Before you spend money on improving your home spend some time thinking about what will make it more valuable to you for long term retirement. Would you be better off selling your current home and buying one that is more energy and maintenance efficient, and has the features retirees need (single story, accessible)? If you do stay where you are, make sure you leave enough money to get the features that in 10 to 20 years will be mandatory to your lifestyle.
For further reading
Demand Institute: Baby Boomers and Their Homes
In Retirement, A Big House Can Lead to the Poor House
The Retirement Piggy Bank You Are Probably Overlooking
Comments? What are your plans for your next home. Will you stay where you are, or will you move. If you are staying, do you plan on any improvements? Do you intend to spend more or less? Bigger or smaller? Will you get a mortgage? Please share your ideas in the comments section below.