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Determining How Much House to Buy as You Enter or Approach Retirement

In a previous post, we discussed some rules of thumb in determining how much house you can afford, e.g. considering whether your mortgage payment and other lump sum housing expenses would be affordable in light of your income.  However, these rules of thumb are more appropriate for home buyers in the early- to mid-career phase, rather than those approaching or in retirement.  Late in your career, you may have the income and/or assets to support a very large home purchase, but that may not be in your best interest–personally or financially.  Here are some factors to consider as you determine how much house to buy later in life.

To Upsize or Downsize.  Some nearing retirement look forward to downsizing their home and simplifying, especially if they have launched their kids and no longer need as much space as they once did, but others see upsizing as a more appealing option.  Perhaps they finally have the time and resources to plan or purchase their dream home.  Perhaps they want more space to host family gatherings.  If you are thinking about changing your housing situation at or near retirement, consider the following.

Upkeep.  What will your new home require in terms of upkeep, cleaning, maintenance, and repairs?  Will you be responsible for all of it?  (Some townhouse communities, for example, will take care of exterior upkeep.)  Are you prepared to pay others to take care of it if at some point in the future you are unable or unwilling to do it?  If you plan to stay in your new home long term, consider how your health and mobility might change over that time period.

Time Away.  If you plan to travel extensively in retirement, consider what sort of home you would feel comfortable leaving for long stretches of time.  One of our clients, for example, is planning to downsize from a large older home to a condo in retirement, so that he can lock the door, travel for a couple weeks, and not be concerned that something may break in his absence without anyone to notice or react to it.

Cost, Financing, and Taxes.  Especially if you are still working, perhaps at or near the highest earning years of your career, you may be eligible for a large loan if you are considering the “upsize” option.  You may not face the same borrowing constraints as earlier in life when you had lower income and assets, but consider what is reasonable in light of your retirement goals and whether your housing choice now might create stress once you stop working.  Keep in mind that, depending on what industry you work in, you may be forced to stop working earlier than planned.  We’ve seen this several times.  Your ability to purchase a more expensive home will depend in large part on the level of your assets and/or your income in retirement.  For example, if you have a significant pension, a large mortgage that lasts throughout retirement may not cause as much financial stress and may carry greater tax benefits for you than for someone relying solely on assets to fund their lifestyle in retirement.  By contrast, if you have no pension and most of your savings is in retirement accounts (and will face ordinary income tax when withdrawn), you may want to avoid or minimize the mortgage on a new home in order to lessen withdrawals from your retirement accounts and continue taking advantage of tax-deferred growth and compounding.

What the right move is for an individual or couple, of course, depends on their personal preferences and the details of their financial situation.  If you have questions about how much house would be appropriate and how best to finance your choice, please give us a call.  We will try to help you achieve your housing goals without compromising your lifestyle in retirement.


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