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Ask Brian: What Should We Be Considering For Our Retirement Home?

By Brian Kline | February 28, 2022

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

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Question from Lilly in TX: Hi Brian, My husband and I plan to retire in about 4 years. Our last child has been away at college for two years. Today we have a much larger home than the two of us need. We’re planning to buy a smaller home in the next couple of years, possibly in a retirement community, The biggest challenge we face entering retirement is that we had planned to have our mortgage paid off by then. We’ll have a substantial down payment for our last home, but we anticipate needing to take out about a $125,000 mortgage. What options should we be looking at?

Answer: Hello Lilly. I’m certain there are a lot of people facing the same question. Fortunately, you have many options. For one thing, you could consider moving to a less expensive location where the equity in your current home is enough to pay cash for a smaller home. If you want to stay near where you are and know you will have a mortgage after retirement, you should build a new budget from scratch to figure out how much you can afford for a mortgage payment each month during retirement. This should account for both your retirement income and expenses along with a prudent reserve for emergencies.

Whatever you do, don’t create your retirement budget based on today’s working income. It’s rare for retirement income to meet or exceed retirement income. On the other hand, you will have fewer expenses in retirement. The daily commute goes away, less is needed for clothing, no professional fees, fewer work lunches, etc. However, and this is unpleasant to think about, what happens if one spouse passes away before the mortgage is paid off? Can the other afford the mortgage on only one retirement income? These are all reasons why you should create a new retirement budget that takes a fresh look at your predicted retirement income and changing expenses.

Once you know how much you can afford, you still have options about how much you pay towards a mortgage each month. If you still want to reach your original goal of having the security of a paid-off home, you can pay the largest possible amount towards the mortgage over the shortest amount of time. For instance, taking out a 10-year mortgage and making extra payments to pay it off in 8 years. If you did this soon (before retiring), you would only be paying on your mortgage for 4 years after retiring. You’ll save a lot in interest payments by doing this. However, a new 30-year mortgage on $125,000 might be very affordable on your retirement income and would leave you with more spendable money each month. Of course, you have other options about how long you pay on a mortgage such as 15 or 20 years. Online mortgage calculators are great for looking at multiple scenarios to learn which one best fits your needs.

In any case, something important to consider about your last home is maintenance and repair costs. Generally, the older the house, the more maintenance costs you can expect. Even if you’ve been doing most of the maintenance yourself, as age creeps up, you may find a need to hire help for more of it. That includes lawn care. Most retirees usually want less maintenance.

If you buy a new home, it will come with a warranty for a limited time. You can expect less in repair costs with a newer home but not much less in maintenance. Also, during your budgeting, be sure to factor in taxes and insurance. These are currently wrapped into your mortgage payment but don’t go away when the mortgage is paid off.

It’s great that you’re having this conversation several years before retirement. The sooner you begin, the more options you’ll have to consider. Another option is selling your current home but not using all the money towards the smaller home (take out a bigger mortgage). You could use the money for other purposes. If you will have a good income in retirement, you may not want to be “house rich” but “cash poor.”

Lilly, there are a ton of other considerations that go into deciding on the dream home for your retirement. Too many to list here but a few that many people find important are:

  • A location with nearby medical facilities to maintain your health.
  • That ideal sleepy mountain cabin you vacationed at a few years ago might be too quiet and lack activities to fill your time during retirement.
  • Floor plans without stairs are important or at least the master bedroom on the ground floor.
  • A small yard and/or a homeowner’s association that takes care of lawn care could be a consideration.
  • If you are considering moving to a new location for weather, family, or lower costs, it would be good to take a couple of long vacations there to get a solid feel for it. Preferably during different seasons of the year.

Your retirement should be stress-free and enjoyable. Making the wrong housing decision can cramp your plans. It really is wise to first figure out your retirement budget. You may have other budget options such as withdrawing a lump sum from a 401k account. But that has significant tax implications. If this all seems overwhelming, consulting with a financial planner is a good idea. The best plan will come when you sit down with a financial planner and already know what many of your options and preferences are.

Lilly, there is not a one-size-fits-all home solution for retirement. But you are on the right track by beginning sooner rather than later.

Please comment with their thoughts and experiences about buying a retirement home.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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