Your Humble Abode(s)

Credit: nonicknamephoto

I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom