HOUSING EXPENSES IN RETIREMENT

Retirees often revisit their living situation and housing expenses.

The home they own might be too big, too expensive, or too time-consuming to maintain. Many retirees begin to think about downsizing.

These housing decisions can be complicated and involve a lot of emotion. Moving to a new home is a big deal, especially if you have lived in your current home for many years.

Today, I want to focus on the financial considerations retirees face when deciding whether to stay in their home, rent, or downsize to a condo.

The emotional and personal factors are just as important, but they are unique to each person.

For this analysis, I am using estimates and averages. Housing costs vary widely depending on where you live, so you will need to plug in your own numbers to calculate your actual costs. The averages, however, provide a useful illustration of the financial differences between the three scenarios: staying in your home, renting, or downsizing to a condo.

There is one important part of the financial calculation that most people overlook: the opportunity cost of the equity in your home.

If you sell your home and rent an apartment, you can invest the proceeds from the sale. If you downsize to a condo, you can invest the difference between the amount you receive from selling your home and the cost of purchasing the condo.

That investment opportunity can have a significant impact on the overall financial picture.

THE ASSUMPTIONS

Here are the assumptions I used for this analysis. Again, housing values and expenses can vary significantly depending on where you live. I live in the Northeast, where home values tend to be relatively high.

Home value: $800,000

Condo value: $600,000

Mortgage: None — the mortgage is assumed to be paid off.

Selling costs: 5% of the sale price of the home.

Utilities: Lower utility costs are assumed for the apartment and condo due to their smaller size.

Here are the estimated monthly costs I used.

	OWN HOUSE	RENT	OWN CONDO
VALUE	$800,000		$600,000
mtg/rent/condo fees	—	$3,000	$400
re taxes	$550	—	$400
home ins	$200	—	$100
maintenance	$400	—	$200
heat	$600	$450	$450
elec	$150	$100	$100
water	$75	—	$45
Total Expense	$1,975	$3,550	$1,695

As you can see from the table, the monthly housing expense is significantly higher for the apartment rental—approximately $3,550 per month compared with $1,975 for the house. The condo scenario is slightly less expensive than staying in the house, at approximately $1,695 per month.

But this is only part of the story.

INVESTMENT GAINS

The expenses above probably aren't surprising. The concept I want to introduce—and one that many people overlook—is the opportunity cost of the equity in your home.

Your home may be worth $800,000, but that $800,000 is not producing investment income for you while you continue to live in the home.

When you sell the house and move into an apartment, you can invest the equity that is released from the home, after selling costs. When you downsize to a condo, you can invest the difference between the value of your old home and the cost of the new condo, again after considering transaction costs.

For this example, I am assuming my Growth & Safety investment strategy generates an average annual return of 12% to 14%. I am using 12% for this analysis to be somewhat conservative. Most of you are using my Growth & Safety system so you will get these returns.

If you are a more typical retirement investor earning 7% per year, you can substitute 7% for 12% and calculate a different result.

The rental scenario

In the rental example, selling the $800,000 home and allowing for 5% selling costs would leave approximately $760,000 available to invest.

At a 12% annual return, that could generate approximately $91,200 per year, or about $7,600 per month in investment gains on average.

The rental housing expense is approximately $1,575 per month higher than staying in the house. However, the $7,600 of potential monthly investment gains more than offsets that additional expense.

That produces a potential net financial advantage of approximately $6,025 per month, or $72,300 per year, compared with staying in the house.

The condo scenario

The condo scenario is different.

If you sell the $800,000 home and purchase a $600,000 condo, you have approximately $160,000 of equity that can potentially be invested, after accounting for transaction costs.

At a 12% annual return, that $160,000 could generate approximately $19,000 per year, or $1,600 per month.

In addition, the estimated monthly cost of owning the condo is approximately $300 less than the cost of remaining in the house.

That means the condo scenario provides a potential financial advantage of approximately $1,900 per month, or $22,500 per year, compared with staying in the house.

	OWN HOUSE	RENT	OWN CONDO
Total Expenses	$1,975	$3,550	$1,695
Equity Income	—	$8,000	$1,600
Mthly exp/income	($1,975)	$4,450	($95)
Annual exp/income	($23,700)	$53,400	($1,140)
Difference vs. house		$77,100	$22,460

HOME VALUE APPRECIATION

I did not include future home appreciation or capital gains taxes in this analysis.

It is reasonable to assume that home values could appreciate over time. But appreciation is different from investment income. Unless you sell the home or borrow against its equity, the appreciation does not provide you with cash flow that you can use during retirement.

Those of us who purchased homes in our twenties or early thirties have benefited from significant appreciation over the past 30 or 40 years.

But as you enter your sixties and seventies, the financial priorities can change. At that point, many retirees are more concerned with generating income, preserving capital, and enjoying their retirement than maximizing the future value of their home.

That doesn't mean home appreciation is unimportant. It simply means it should be considered separately from the income-producing potential of the equity tied up in your home.

RENTING VS. OWNING

Renting is very different from owning.

Who you rent from is important, and rents generally increase over time. Some people also prefer the security and stability that comes with owning their home.

I haven't necessarily convinced my wife of the benefits of renting!

Personally, I like the freedom of renting and not having to take care of everything that comes with owning a home. Some people enjoy home maintenance projects. I don't want to spend any of my precious time left on this earth dealing with home repairs and maintenance.

I also like the flexibility that renting can provide.

The rental scenario potentially creates significantly more investment capital and cash flow each month. It can also make it easier to spend part of the year somewhere else.

For example, rather than maintaining a second home, you could rent a place for a couple of months during the winter in a warmer climate—or even spend several months in Italy.

That's one of the things I find most appealing about this strategy. You are not just changing your housing expense; you may be creating more financial flexibility and more choices for how you spend your retirement.

A PERSONAL CHOICE

Where you live in retirement is a very personal decision. It involves financial, emotional, family, lifestyle, and practical considerations that only you can evaluate.

There is no single right answer.

Some people will want to stay in the home where they raised their family. Others will want to downsize. Some will prefer the flexibility of renting.

Being the investment guy, I simply wanted to provide a different way of looking at the financial side of the decision.

Don't just compare your mortgage, rent, taxes, and maintenance costs.

Look at the equity tied up in your home and consider what that money could potentially do for you if it were invested.

That opportunity cost can be a very important part of the retirement housing decision.

Stay Disciplined My Friends,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.