How to reduce your housing costs in retirement

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Why Paying Off Your Mortgage in Retirement May Not Be the Best Idea

Housing is likely to be your biggest retirement expense. But there are a variety of ways to pay less for housing in retirement. Here's what you can do to bring down your housing costs after you retire.

Pay off your mortgage. Paying off your house eliminates one of your biggest monthly bills. Insurance, taxes and maintenance costs are likely to be only a small fraction of the amount you were paying for your mortgage. For example, homeowners ages 65 and older in Jacksonville, Florida, pay a median of $1,271 in monthly housing costs if they have a mortgage but just $433 monthly if they have a paid-off home, according to Census Bureau data. If you don't have the resources to pay off your mortgage before retirement, you might be able to reduce your interest rate by refinancing. "If your interest rate is high, you can look to refinance to take advantage of lower rates," says Christopher Herbert, managing director of the Joint Center for Housing Studies at Harvard University. "Nowadays it's not uncommon for people in their 50s and 60s to refinance to take advantage of lower rates, and they are extending the time they are going to be paying their mortgage well into retirement"

Downsize. Once your children grow up, you no longer need multiple bedrooms or an expansive yard. And you may not want to take care of a large property that only one or two people use. Downsizing to a smaller house can add money to your nest egg and free up the time you would have spent mowing a large lawn and cleaning several stories of rooms. Downsizing from a $300,000 home to a $150,000 house could add $100,000 to your nest egg, even if you spend $50,000 on selling and moving costs and home improvements. "After their kids move out, a lot of my clients downsize their home, and then they put the surplus into an investment account so that it can start growing," says Angela Dorsey, a certified financial planner for Dorsey Wealth Management in Torrance, California. "This reduces their mortgage, their utilities, their property taxes, and they're really at a point in their life when they don't want to maintain a larger home." You may also be able to generate some extra cash by selling off the furniture and appliances from your former home.

Relocate. Retirees don't need to live in expensive cities that are close to their jobs or in high-cost suburbs with good school districts. You are finally free to live anywhere in the world that has the entertainment options and amenities you desire. You might choose to live near the beach or in a place where you can play golf every day, or you could relocate to a sleepy college town with a low cost of living. If you move to a place where housing costs significantly less than where you live now, you can use the extra cash to help pay for your retirement expenses. "Many people sell their home in California, and then they pay all cash for a home in another state," Dorsey says. "They are able to move to Texas or Florida and buy a home all in cash, and now have no mortgage, and they usually end up with a bigger home." For example, if you sold your home in San Jose, California, for the median home price of $636,900 and purchased a home in Austin, Texas, for the median home value of $192,000, you could add over $300,000 to your nest egg, even after accounting for transaction costs. Senior citizen homeowners also qualify for property tax discounts in many parts of the country, which can further reduce your housing costs.

Become a renter. Homeownership can be expensive and a lot of work, especially if you live in an older home in constant need of repairs. Becoming a renter in retirement frees up the equity in your home to use for living expenses, might allow you to relocate closer to the city center where you could walk to shops and local attractions and makes someone else responsible for the major upkeep of the property. The downside of renting is that your monthly rent could be increased significantly each time your lease is renewed, which can be difficult to cope with on a fixed income. "To sell your home and then rent gives you a nice cash infusion, but [retirees] have to be careful because there may be tax consequences, and you're not protected from inflation because your rent can go up," Dorsey says. And you could be asked to move, which creates the burden of finding a new place to live.

Reverse mortgage. Retirees ages 62 and older can use a reverse mortgage to tap their home equity to pay for retirement expenses while remaining in the home as long as they live. But reverse mortgages also have a variety of fees, and if you move or sell the home, the loan becomes due. Plus, your children won't be able to inherit the home unless they repay the loan. "A reverse mortgage removes the obligation for monthly payments going forward, and under certain circumstances it might provide tremendous financial security, but it's something that should be used as a last resort," Herbert says.

Share your living space. Many retirees eventually find themselves living alone, especially after a spouse passes away. It can improve your finances and your social life if you live with others. You could rent out a room in your home and use the money to help defray retirement expenses. "I live in a college town, and a lot of people will rent out their house on game weekends during football season," says Roger Pine, a certified financial planner for Briaud Financial Advisors in College Station, Texas. "That reduces the overall cost of ownership." Or you could take on a roommate for part or all of the year. Moving in with your children or grandchildren is another option that can benefit both parties financially, especially if you thoughtfully negotiate who will be responsible for what chores and expenses ahead of time.

Copyright 2015 U.S. News & World Report

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