Planning For Retirement: Determine Your Housing Costs

by News Guy on March 7, 2012

(Guest Post)

Retirement looms large for the average working American. Ever since we get our first job, most of us have likely been setting aside money for that day when our careers come to an end. We have a 401k and get to choose from individual retirement account options. And we make regular retirement contributions and invest in stock with our post-work lives in mind.

But while we spend many years saving for retirement, few of us actually take the time to plan out our retirement spending. We are told that we are likely to spend 70-80% of our peak career salaries in annual retirement expenses, but we are not told how to make that happen. Rather, it is simply assumed that our costs will reduce by 20-30% once our work lives come to a close.

While it is true that most retirees will end up spending substantially less in their latter years, these spending reductions are not universal and – for many people – need to be practiced and properly planned for. For example, the 70-80% prediction rests on the assumption that a retired couple will spend significantly less on transportation costs. If you worked from home throughout your career and plan to travel extensively during retirement, however, you may actually find yourself spending more on transportation than you did while working. You then need to find reductions in other areas in order to realize the 70-80% prediction.

On that note, this article focuses on one such area where most retirees spend significantly less: housing. While standard convention suggests that most retired individuals spend less on housing after finishing their careers – a savings that is included in the 20-30% expense reduction – the above transportation example illustrates that this is not always the case.

How, then, can your predict whether your housing costs will rise, fall, or stay the same after you hit retirement?

The first and most obvious consideration is the state of your current mortgage, if applicable. If you have a mortgage and are still paying it off, will you own your home by the time retirement arrives? If yes, will you stay there? Affirmative answers to both of these questions would substantially reduce your housing costs and put you in line with the average retiree.

On the other hand, if you are planning to move homes during retirement, there are many other factors to keep in mind. But you should first and foremost be asking yourself one crucial question: Where am I planning to move? Some retirees stay in the same neighborhood but downsize their home, in the process saving money on the sale prices as well as on lower utilities, taxes, and maintenance costs.

Others relocate elsewhere in their metropolitan area. Most of these relocations consist of moving from a suburb into a city, a move that usually saves money even when the condo market is high. And some retirees also save money by moving further afield and settling down in a college town or small city.

So what retirees actually spend more on housing? This group can be divided broadly into two categories: first, those who move to a sought-after retirement destination (think Palm Springs or Miami), and second, those who move into an ultra-expensive urban area (such as New York or San Francisco). Retirees in both these groups will likely see housing cost increases – and, if they don’t plan correctly, may be surprised to learn that their post-career expenditures fall higher than the 70-80% range.

Consequently, the place you choose to retire is something that should be considered long before you turn 65. After all, if you plan to see an increase or a stabilization in your housing expenses, you may need to save more for retirement than the average person – or, at the very least, you might have to spend less on transportation and food once you get there.

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