Your biggest retirement expense (and how to get rid of it)

biggest retirement expense

Let’s take a poll.  What do you think will be your biggest retirement expense?  Travel?  Healthcare?  Plaid pants?  Mai Tais?

Actually, according to a recent report by the Employee Benefit Research Institute (EBRI), you’ll likely spend the most (40-45% of your budget!) on housing.  That’s right.  The Casa. Good old home sweet home.  Nearly half of your income will likely go to cover things like your mortgage, taxes, utilities, and maintenance.

For some reason this doesn’t sit well with me.  Just like the argument for life insurance becomes less compelling as we age, it would seem to me that the argument for spending the lion’s share of your budget on housing becomes less compelling as well.

Yes, there was a life stage where it made sense to spend heavily on housing.  You hadn’t saved much and needed to borrow.  You needed space for a growing family.  You wanted to be near good schools.  A nice house was comfortable and conveyed a certain amount of status.  But are those reasons as compelling in retirement?

After the EBRI report came out, most articles I read on the subject focused on how retirees could cover such a large expense.  But what if you reframed the debate from “How?” to “Why?”  WHY spend such a large portion of your income on shelter?  Especially during retirement.  Every dollar you spend on shelter is a dollar that you’re not spending on travel, hobbies, and other pursuits that provide meaning, purpose, fulfillment, and enjoyment.

Quick Note: I am NOT saying that having a nice house in retirement is bad.  Some have their house paid for and it’s a low cost option.  Some can totally afford a nice house without it impacting their other plans.  For some, the house IS their plan (e.g. a place for kids and grandkids to gather, a neighborhood close to friends, a place to entertain, etc.).  The only time where an expensive house might become a problem is when the costs associated with it prevent you from being able to afford the things you really want to do in retirement.  If that’s the case, I think it’s worth considering alternatives.

With that said, I’d like to ask you three questions that will hopefully challenge your thinking on your house and just might lead you to pare back your spending on shelter so you can maximize spending in other areas that matter more to you.

Question #1: What would it take to pay off your house before retirement?

One way to reduce your housing expense would be to outline a plan to have your house paid off by the time you retire.  You’ll still have expenses like taxes, insurance, and maintenance, but you’ll no longer be paying principal and interest on a loan.  Here’s a post that will walk you through how and why to retire debt free.  And if you want to play around with different payoff scenarios and run some amortization schedules, the app “Debt Free” is helpful and simple to use.

Question #2: Would your retirement be better if you made a conscious effort to downsize and simplify?

A few months ago I interviewed Joshua Becker of Becoming Minimalist (you can listen to the full interview here).  We talked about ways that you can simplify life, minimize stress, and focus on what you really want out of life and retirement.  One of those ways was to declutter your house and possibly even downsize to something smaller.  This frees up time and money to focus on other priorities.  If simplifying sounds appealing, check out the Intentional Retirement Pinterest Page where we have boards for things like cooking for two, tiny houses, and the art of simplification.

If you want to go one step further, I personally think it’s worth at least asking if homeownership still makes sense for you during retirement.  Taking care of a house is more difficult as you age.  You don’t have the same space needs. It ties up a huge chunk of your nest egg.  If you compare owning vs. renting, you might find that owning is not the “no-brainer” that it was during your working years.

Question #3: What if you redefined status in retirement?

Let’s be honest.  Our culture confers a great deal of status based on things like homes and cars.  It’s easy to get sucked into that game.  Especially when banks are more than willing to put you in debt up to your eyeballs so you can make a good showing for the neighbors.

What would happen if we started to buck that trend?  What if, instead of the currency of status being “stuff”, we started to make it travel, purpose, time with family, happiness, and freedom.

A year or so ago I read about a couple living in California who spent about $7,000 per month on housing, cars, groceries, eating out, entertainment, and vacations.  They wanted a bit more adventure during retirement, so they sold the house and cars and hit the road with the goal of extended stays in interesting places for the same or less than what they were spending in California.  They stayed several months in London for $6,800 per month.  Florence and Paris were a bit less at $6,050 and $6,550 respectively.  Buenos Aires was a comparatively modest $4,400 per month and Mexico was practically a bargain at $3,450 per month.

Is this for everyone?  No.  Should we do those things simply for the status associated with them?  Definitely not.  Climb the mountain so you can see the world, not so the world can see you.  But if we’re going to admire people for something, we could pick worse criteria than looking up to those who live a full life.

Bottom line – think through what’s important to you during retirement.  What do you really want to do?  Once you have that list, invest heavily in those things.  If your house is on the list, great.  If not, don’t allow it to consume most of your resources at the expense of everything else on your list.

Joe

Photo by Joe Hearn.

3 Responses to “Your biggest retirement expense (and how to get rid of it)”

  1. Sam Pittsburgh January 26, 2015 at 7:59 am #

    Great read….good points!

  2. Kathy @ SMART Living 365.com May 4, 2016 at 10:40 am #

    Hi Joe! This is a great article even though it seems so obvious. I completely agree that people don’t seem to want to face the fact that their housing can suck up so much of their retirement resources if not thought out and planned for in advance. My husband and I worked to simply and scale our housing back several years ago so that it is both completely debt free AND we have solar with all our utilities coming in at less than $50 per month. That’s a good feeling. And we don’t call it downsizing because that sounds like a person has to sacrifice. Instead we call it “rightsizing” and I’ve written about it quite a bit. Thanks so much for reminding me and us all that reducing and/or eliminating housing costs is a good way to go. ~Kathy

    • Joe Hearn May 6, 2016 at 9:21 am #

      Thanks Kathy! Great point on the rightsizing. It’s really easy in America to just go with the flow and tie up an enormous chunk of money in a big house that you’re not really utilizing. Better to rightsize and free up some of that money to invest in things like lifestyle that bring a bigger “return on investment” than square footage that you’re not using. Thanks for following along. -Joe

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