Housing as a Percent of Retirement Nest Egg (move, state, relative)

[BellaDL]

I don't think that there is one number or one ratio for housing cost or expenses which is the best for all retirees. There are just so many variables and so many factors: income, expenses, debts, net worth, how long that one plans to stay in the house, locations (appreciation, depreciation, reselling possibility etc.).

For us, the key financial factors in deciding how much to spend on a relocation home are:

1. Monthly expenses (mortgage, property tax, insurance, utilities, maintenance/repairs) can be covered by our monthly fixed income.

2. The down payment (minimum 20%) can be covered with our put-aside cash saving so that we will not be forced to liquidate our mutual funds/stocks in unfavorable market condition

3. The mortgage should be under the maximum conventional loan limit to avoid having to pay higher interest rate and under or at the maximum mortgage amount which we are (or likely to be) qualified.

When we bought our current house early this year, it turned out that we did have to liquidate a small portion of our mutual fund shares to come up with 25% down payment. The house which we liked cost $100K more than we had wanted to spend. We also wanted to keep the mortgage below the conventional loan limit.

In our experience, the emotional factors can easily override financial factors.

1. We had decided to stay in New York but decided to relocate to Idaho because of our daughter's health issues.

2. We spent more than our planned budget to get this house which met not only our needs but also our wants/wishes. We were blown away by the breathtaking views of the river, mountains and sunsets. I hate to use the term 'dream' home but this house offers us a lot more than we had ever expected. The previous owner (who lost his wife the year before and had to move to an assisted living home) called the house 'a paradise'. It does seem like a paradise for us who are nature lovers, birders, photographers and rowers

We are very lucky to find a wonderful home close to our daughter's vet clinic and home.

My suggestion is to set a budget then go and look for a house. You may end up spending more or less than your budget depending how you feel about a house.

So we ended up depleted our cash saving and liquidated some of our mutual fund shares. We considered what we spent on the house was just a transfer of asset and not spending. This can also be a very good investment considering the growth of the area and the house location. The enjoyment that we have living in this beautiful place and being close to our daughter is priceless.

BTW, we could have sold more shares of our mutual funds/stocks to pay cash for the house but preferred having a mortgage. Our previous paid-for home in NY is currently under contract. It's likely that we will invest most of the proceeds with the remainder in cash saving for discretionary spending. It's a no brainer for us to be 'in debt' in retirement with a 3.25% mortgage interest and 0% car financing. Previously, we had no debts for 15 years before retirement and 2 years in retirement.

[dothetwist]

Do what makes you happy...but not so much that it will make you poor. We have about 50% of our assets' value in 2 houses (both mortgage free). But that other 50% will likely never be used.

I tend to look at the cost to carry homes. It is much more expensive for us to carry our US house versus our Mexican house by about 8:1 (and they are worth appx. the same USD amount).

I won't own 2 homes in the US; we could afford it, but I get a bit steamed over the amount of US real estate taxes and homeowners insurance in desirable areas.

[mathjak107]

the real deal is not the percentage in housing but the ratio between discretionary and non discretionary income .

you need to maintain flexibility so when emergencies and unexpected spending strike you have a comfort range to cut back in . you have no flexibility when everything in the budget is a need and not a want

[townshend]

I appreciate all the replies and recognize that I probably should have provided some more parameters.

I never meant to imply that a single percentage would somehow function as a magic license for everybody to devote said portion of their retirement savings to housing.

I am fortunate to have no debt. I am contemplating outright buying property, to avoid monthly mortgage payments. I recognize that homes are liabilities, not assets, and involve continuing cost for utilities, maintenance, insurance, taxes, etc. I do not have a pension, but rather a pile of savings and modest investments.

Colorado being one of the few states that taxes SS benefits is the least of my worries. Those 65 and older can exclude benefits and other retirement income up to $24,000 per year. Also, SS income not taxed by the federal government is not added back to adjusted gross income for state income tax purposes.

The only way to compare states for retirement is to look at entire state tax burden, not any one isolated tax. I read about this in the past, that Colorado is favorably considered a "tax friendly" state for retirement. YMMV.

I recognize that one could answer this question by doing (as recommended above) a forward spending cash flow/cost-of-living analysis, but that is also difficult, having 1) just retired; and 2) just moved to a new state. Not to mention numerous variables, such as future inflation rates and other niceties that will greet us.

The reason for asking is just to get some general thoughts on this topic. I recognize that one can have too much tied up in a house, etc. It has never happened to me, fortunately.

Renting just won't cut it for me. I'm not worried that the money in purchasing housing "can't be put to work in investments." It is already working for me, by controlling rent increases, an important component of cost-of-living in retirement. What is left over is the money that is invested.

[MrRational]

Originally Posted by townshend

I never meant to imply that a single percentage would somehow function ...

Nope... but there is a range that can be considered reasonable.
Well, for most; those who aren't so wealthy that it doesn't really matter.

I recognize that one can have too much tied up in a house, etc.
It has never happened to me, fortunately.

Then you're lucky. I'd say that MOST have been in that 'too much' position most of our lives.
With younger kids it's hard not to be but at some point the mortgage has been paid off
as well as the HELOC etc used to fix the place up to last another 30+ years.

Because of market appreciation factors MOST of those family homes will have far more
investable CASH tied up in them than most retirees should leave on the sidelines.
More than most retiree's can afford to leave on the sideline.

What is left over is the money that is invested.

That's one approach. But like with the 'save for retirement' thread the division seems
to be those who will save first and manage (invest) whats left vs those who make the
buy/own choice first and will save/invest what the balance allows for them to do.


The first group will have more/better choices to make.

[bpollen]

Originally Posted by townshend

Please pardon the awkward title.

I am recently retired (almost 65) and am currently renting a studio apartment near Montrose, CO while I get to know the area. Eventually I plan to either buy a house or have one built. One of the primary reasons I plan to buy is that owning one's home is a hedge against the inflation or rise of rental rates over the next several decades. BTW, I don't care to debate owning vs. renting -- I prefer owning, but for others, renting may be a better option.

I know there are lots of variables -- some known and others unknown -- to trying to determine one's cost of living during retirement. Of course, where one chooses to live is a huge variable. And how much one has saved is another huge variable. If I had two million or more, I probably wouldn't even bother to ask this question.

But I still wrestle with one basic question: how much of one's personal retirement savings can I devote to buying a house, expressed as a percent? To me, it is obvious that an individual should not devote 50% or more to housing alone. But where does one draw the line? BTW, I don't plan to take SS until I turn 66, and I may wait somewhat longer (I understand the it increases by 8% per year up until 70).

Have others wrestled with this decision? Or is there a thread I am not aware of where it is discussed? Thanking you in advance for your comments.

[Part of the difficulty in this thread is that we have to deal with generalities. I don't think anyone should go online and declare how much they have -- or don't have. YMMV.]

I didn't approach it that way. I had a retirement account. Then I sold my house to move & spend less, so I could pocket at least something from the sale. I figured this out on paper before I made my plans. Would my retirement account less the amount of the house (and not insignificant expenses for moving, storage, renting) leave me with enough to last?

When I worked it out on paper, I decided ultimately how much I could spend on a new house and have enough for retirement.

I ended up spending 25% on the house, after the sale of my house (retirement acct + funds from sale of my house). That does not include all the costs besides cost of the house, which I don't even want to think about.

I don't recommend to anyone selling their house & "buying down." All I did was end up giving money to the storage place, the moving company, the rental landlord, and inspectors & title co. Well, it wasn't that bad...but I didn't end up with as much to add to my retirement account as I thought I would. Particularly since I hate it where I am, so I have to move again, so I don't spend the rest of my life in misery. I will have to buy down again and stay in a cheap rental in an unsafe part of town next time. Unless I'm lucky enough that a seller accepts a contingency offer so I can move directly in w/o renting.

[jakabedy]

It’s all a sliding scale, and everyone is in a different spot on that scale. I learned this week of a relative by marriage who is in dire financial straits. Her only income is from disability (a fairly recent development), she has run up huge consumer debt and has zero cash savings. She does own a $100K home outright. There are no good options for her. This is one end of the scale to avoid (100% of assets in the house). At the other end of the scale are those who have the assets to own, but strictly rent to avoid tying up any assets at all. But all along the continuum are perfectly fine places for folks to dwell.

Some of it depends on your cash flow. Do you cash flow enough to comfortably carry a mortgage long-term? If you don’t, then you don’t. It then makes sense to work longer or dedicate more savings to purchase a home outright (or pay off the home you’re in), or both.

I think it also depends to a degree on what you want to do instead with the money you’re reluctant to tie up in a house. If you don’t have a lot of desires that involve spending (travel, toys, gifting, etc.), then you have less to worry about by having a higher percentage of your net worth tied up in the house. We don’t have a lot on our bucket list. But we do appreciate architecture and design and hope to retire in a semi-pricy location. We also love spending time at home and having friends and relatives visit us. Our house IS our primary hobby. For us, it makes sense to spend the money on the house we want even if that means less cash stashed away.

While we’ll have decent cash flow with pensions and SS, carving a mortgage payment out of that flow would be sub-optimal. That’s why we’re paying off the current house and I’m continuing to work until we meet a savings goal that will allow us to both build the home we want and have a decent nest egg.

[mathjak107]

one thing i want to mention is that i see many have a pecking order . first they pay off the house , then they pick up the investing for retirement .

when dealing with investments in markets time is your friend . not only does the later you start effect the balance but the later you start the more you are dependent on the whims of the markets .

over longer periods of time good and bad markets always average out within 2% of each other .

shorten that time frame and you become much more dependent on that window you are in . what if you paid off the house and we have another 13 year market recovery which is what 2000-2013 took once inflation adjusted ?

so you need to live off your savings you really want to get the investments going early on , not pay off a mortgage that is not due yet . that would likely be an inefficient plan as well as a risky one when you shorten your investing time frame . .

[GeoffD]

The day I die, I’ve balanced it perfectly if 100% of my net worth is my house and I’m still living in the house.

For someone with a good pension that has COLA protection, I think you can have most of your net worth tied up in your house. If you have no pension and a piddling Social Security check, it’s the opposite.

My home ownership costs project to be about 15% of my age 70 Social Security check. I should have no problem covering my living costs with that check. My retirement portfolio ends up being an emergency fund for big ticket items and discretionary spending for non essential things.

[Tall Traveler]

Originally Posted by townshend

Please pardon the awkward title.

I am recently retired (almost 65) and am currently renting a studio apartment near Montrose, CO while I get to know the area. Eventually I plan to either buy a house or have one built. One of the primary reasons I plan to buy is that owning one's home is a hedge against the inflation or rise of rental rates over the next several decades. BTW, I don't care to debate owning vs. renting -- I prefer owning, but for others, renting may be a better option.

I know there are lots of variables -- some known and others unknown -- to trying to determine one's cost of living during retirement. Of course, where one chooses to live is a huge variable. And how much one has saved is another huge variable. If I had two million or more, I probably wouldn't even bother to ask this question.

But I still wrestle with one basic question: how much of one's personal retirement savings can I devote to buying a house, expressed as a percent? To me, it is obvious that an individual should not devote 50% or more to housing alone. But where does one draw the line? BTW, I don't plan to take SS until I turn 66, and I may wait somewhat longer (I understand the it increases by 8% per year up until 70).

Have others wrestled with this decision? Or is there a thread I am not aware of where it is discussed? Thanking you in advance for your comments.

[Part of the difficulty in this thread is that we have to deal with generalities. I don't think anyone should go online and declare how much they have -- or don't have. YMMV.]

We are building a new house which will consist of about 25% of our wealth...personally, I wouldn't want to go above that. I suppose if I had a larger pension income, then that would change my thoughts on that 25%.