People who are preparing for retirement or who are already in retirement tend to stress out about their housing costs. And rightfully so, because these are likely to be the largest costs you will have in retirement, especially if you still have a mortgage. In today’s blog post, I will be sharing 3 ways that you can reduce your housing costs, which should help to alleviate stress and provide for a more secure retirement.
To make this as meaningful as possible, following are 3 realistic, yet fictional case studies:
Case Study #1: Downsizing
Laura is in retirement and has lived in her house for the last 40 years. Her husband passed away earlier this year and she is now responsible for handling her finances. She is under a lot of stress and is feeling completely overwhelmed, not to mention the fact that she is still grieving.
Laura loves working in her yard and landscaping it. However, she is getting older and this hobby of hers has become more and more difficult for her.
Not only is in more difficult for her, but it has become very costly for her. Since Laura never dealt with the finances, she decided to visit a financial planner to make sure everything was in order.
After a lot of analysis, it was determined that if Laura continued down the path she was going, she had a high probability of running out of money. She knew this deep down, but never really had a way to quantify it until now.
As a result, Laura decided that it was time to downsize to a less expensive home that didn’t require a lot of outdoor maintenance. She would have really liked to stay in her home, but she knew she had to cut costs.
And so, while she didn’t like the fact that she had to move, the silver lining was that she was now going to be able to increase her standard of living with a very high probability of never running out of money! And this helped her to overcome the challenge of moving to a new place!
Case Study #2: Moving to Another City or State
Bill and Kathy currently live in Minneapolis, Minnesota, but have longed to move to Tampa, Florida ever since they went there on vacation 20 years ago. They no longer like the colder climate of Minnesota during the winter months, so they feel that Tampa will be ideal for them.
They don’t mind the heat of Florida as they plan to spend quite a bit of time on the beach.
Bill and Kathy’s kids are all grown and have moved away, so they feel it’s the right time to make this move. They’ve talked with their financial planner and everything lines up for them.
So, not only is Tampa a very desirable destination for them, they are also really motivated to move there because cost of living is much lower and there is no state income tax.
Case Study #3: Paying Off Mortgage Early
John and Pam are eager to step into retirement in the next few years. They’ve work several decades at their jobs and they are ready to relax and enjoy their retirement years.
They’ve always heard that it’s wise to have your mortgage paid off when they retire, so they’ve been aggressively paying it down over the years. They expect to have it fully paid off by the time they retire.
While they thought it sounded great to not have a mortgage in retirement, they never considered the alternative – actually having a mortgage in retirement. While this doesn’t necessarily reduce your housing costs in retirement, it does provide an opportunity to have a much larger investment portfolio when they do retire.
You see, John and Pam could have instead invested the money that they were using to aggressively pay off the mortgage. After all, it is very likely that the investment return would have been much greater than the interest on the mortgage and this would have likely resulted in a much larger retirement nest egg.
This in turn would have allowed John and Pam to enjoy a higher standard of living without worrying about reducing expenses.
Whether you are preparing for retirement or smack dab in the middle of it, consider the possibility of downsizing, moving to another state, and / or investing your money instead of paying off the mortgage early. One or a combination of these things could result in you having reduced retirement costs and a larger investment portfolio.
One other important point worth mentioning is that your retirement should not be defined by how little you spend. If you enjoy the size of your house and where you live then you shouldn’t feel the pressure to make any changes. After all, retirement is to be enjoyed.
However, with that said, you must have an idea of whether or not your level of spending can be sustained throughout your retirement. This is really where we specialize. We do detailed cash flow retirement analysis for families to help them understand the probability of running out of money. It’s much better to find this out sooner rather than later so that you can make changes such as downsizing or moving. This sort of analysis helps people to enjoy their retirement and have a peace of mind knowing that everything is in good order.
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What ways have you reduced housing costs? Have you had to move in an effort to reduce your expenses? How did that make you feel? Please share any thoughts, comments, or questions below.