Should I stay in my home in retirement, or downsize? It's a question that homeowners have been asking themselves for years. Most recently, a national survey from NeighborWorks America found that 54 percent of nonretired homeowners over the age of 45 plan to stay put when they retire, hoping to enjoy the home they’ve lived in for decades and where their children have grown up.
But even the best-laid plans can go astray without proper financial planning that maintains enough income in retirement to pay all of the bills that come with owning a home. Follow these tips to make retiring in your castle the dream you’ve always imagined.
[Read: 7 Reasons Not to Move in Retirement.]
Don’t have more mortgage cost and living expenses than retirement income. While most homeowners expect to pay off their mortgage prior to retirement, the truth is millions won’t. According to the U.S Census Bureau, 14 million homeowners over 65 years old had mortgages at the end of 2015. Meanwhile, the Census also reported that, on average, income declines about 20 percent between pre- and post-retirement.
That kind of income drop could blow a huge hole in your retirement budget if you're still paying a mortgage. If you have plans to stay in your home after retirement, actively look at ways to pay off your mortgage sooner. Some choices include adding a little extra each month to your mortgage payment, which will reduce the amount of principal owed dollar-for-dollar, helping you reach full payoff sooner. Work with a financial planner or housing counselor approved by the U.S. Department of Housing & Urban Development to identify which spending reductions most painlessly free up cash for the extra payments.
See if you’re eligible to have mortgage insurance removed. Many homeowners bought their homes with down payments below 20 percent. That means they're charged mortgage insurance each month. Over time the insurance premium becomes a natural part of your monthly payment. However, if the home value has appreciated enough, or enough time has elapsed, mortgage insurance can be cancelled and the monthly payment lowered. Contact your mortgage lender for information on canceling mortgage insurance to free up additional cash, and check out this information from the Consumer Financial Protection Bureau on your mortgage insurance cancellation rights.
In addition, consider refinancing a mortgage if the interest rate you’re paying is higher than the prevailing rate – but don’t extend the term. Lowering the mortgage payments and extending the term may sound like a good idea, but the objective is to put monthly mortgage payments behind you, freeing up that money for other spending in retirement. Not every mortgage lender can provide an off-term refinance mortgage (i.e., a loan for a maturity other than 10, 15, 20 or 30 years), so work with a housing counselor to find a lender that works best for you when refinancing.
Pay for major repairs now, not when items are on their last legs. "If it ain’t broke, don’t fix it" is a well-known mantra. However, when it comes to the major systems in your home and their effect on your retirement budget, it may make sense to pay for some things before you make plans to while away the days in your backyard or traveling.
Items that should be replaced while you’re still a few years from retirement and earning income at peak level include roofs, heating and cooling systems and water heaters. Every home is different, but the average cost to replace a roof is $7,000 to $10,000. That would be a significant expense for the average retiree.
The same thing applies to heating and cooling systems. It’s better to replace these quality-of-life items when you’re at your highest income, not when you may have to dip into retirement savings to make it through a sweltering summer or frigid winter.
When replacing these systems look for the most energy-efficient upgrades within your budget. Water heaters sold today are significantly more efficient than even a decade ago, and hot water is one of the most overlooked household expenses. The annual budget savings from lower hot water bills could pay for the water heater replacement in a few years.
Look for tax credits that can help defray the cost of replacing these important household systems. Although the cost savings credits differ by state, taking advantage of these credits is a one-two to lower your costs and lift your long-term retirement budget.
Take advantage of property tax abatements. Most states offer an opportunity for retirees to reduce their property tax bill. Remember, even if you have paid off your mortgage, the local jurisdiction continues to assess property taxes. In some communities the property tax bill can be thousands of dollars each year. By applying for an exemption from, or reduction in, property taxes, retirees can increase their discretionary income available in retirement.
Some jurisdictions that offer property tax exemptions require the homeowner to update their exemption status. One good way to review the status of your property tax exemption is to check in with the local government when filing income taxes, especially if you’re a homeowner who itemizes. That line currently on your federal income tax form accounting for local and state taxes is a great reminder to look again at your property tax status. As always, check with a professional licensed in your state for advice on preparing tax forms.
Living in your home that contains so many great memories in retirement is the goal of just about every homeowner, and if you follow these tips, you’ll be able to make even more right where you are.
Housing is often your biggest retirement expense. But there are a variety of ways to cut your housing costs in retirement. Here are some ways to pay less for housing after you retire.Pay off your mortgage.
Pay off your mortgage.
When you pay off your mortgage, you eliminate one of your most significant monthly bills. While you will still have to pay for insurance, maintenance and taxes, those costs are likely to be a fraction of your mortgage costs. Your retirement savings will stretch much further if you no longer need to make a large housing payment every month.Downsize.
There's no need for a large house with several stories and a spacious yard once your children grow up. Downsizing to a smaller home that costs significantly less can give a quick boost to your nest egg and eliminate many of the responsibilities of maintaining a large or aging home.
Once you retire, you don't have to live in a high-cost city because it’s close to your job. You can choose to live anywhere in the world that has the amenities, weather and entertainment options you desire. Start dreaming about the beach, a golf community or a college town. Once you exit a large city, you might even be able to buy a newer or bigger home for less money.
Reduce property taxes.
Senior citizen homeowners who are older than a certain age and sometimes below a certain income cutoff qualify for property tax discounts in some jurisdictions. Find out when you might become eligible for property tax breaks in your area, and factor in property taxes and any exemptions provided to retirees before making any moves.Become a renter.
Become a renter.
Maintaining an aging home can be expensive and a lot of work. Selling your home and becoming a renter frees up the cash that was tied up in your home, makes someone else responsible for the upkeep of the property and might allow you to relocate to a city center that is walkable and close to shopping and entertainment options. However, renters could be subjected to significant rent increases or asked to move, which can be difficult to cope with in retirement.
Move in with your children.
Multigenerational households can provide benefits to both adult children and retirees. Grandparents might be able to help with childcare and meal preparation, while also being provided with eldercare when it’s needed. While there is certainly the potential for conflict, a thoughtful arrangement could reduce the expenses of all the involved family members.Share your living space.
Share your living space.
Many retirees end up living alone after a spouse passes away. But roommates aren’t just for young people. Retirees can split the rent or mortgage payment and gain some pleasant company if they live with other retirees. While you’ll need to decide who does which chores, it’s often nice to have someone to share meals or watch TV with.
Rent out a room.
If you have more bedrooms than you need, you might be able to make some money renting out a room. Some retirees take on long-term tenants, while others might make some extra cash on an occasional basis when there is an event in town. There are now several web services that can connect you to short-term renters online.
Sell your stuff.