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Budgeting Question re: Housing Costs
Old 08-11-2015, 05:43 PM   #1
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Budgeting Question re: Housing Costs

We are two years from retiring and I am working on budget spread sheets and I am aware of the formula that no more than one third of one's income should go towards housing.

My question is: Does that figure also include Maintenance, Appliance Replacement, Decorating & New Furniture? Or is it just Mortgage, Taxes, Insurance, Utilities and HOA fees?

Thanks
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Old 08-11-2015, 05:57 PM   #2
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I think that 30% rule of thumb is what is used by mortgage lenders and includes principal, interest, taxes and insurance (aka PITI) and would not include maintenance, appliance replacements, decorating, furniture, etc. or even utilities. And it is measured in relation to income, not total expenses.

While I have never looked at that ratio, FWIW for us PITI is about 31% of total expenses and total housing costs (PITI + snow removal, maintenance, heating and electricity) is about 37%. Works for us.
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Old 08-11-2015, 06:19 PM   #3
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I agree with pb4uski, this was based on lenders rules that have changed a bit over time. I paid off my last mortgage back in '93 (@32yo), so my housing cost are hopefully much lower than 30%.
I don't think there really is a right or wrong on the %. I think it is how can you afford everything in a retirement budget with some margin for market swings or other unexpected expenses.
I would estimate my housing cost more around 14% including maintenance with taxes being about half of it. This includes maintenance, insurance, trash, all utilities (ex cable internet), maintenance of lawn equipment, etc. But then I just did brick chimney repair this year (self done). Note that this is based on my budgeted expected expenses. This is well below SWR estimated by firecalc or similar tools.
Work the retirement budget as a complete budget...everything included. For us having the house paid off, it is a smaller part of the budget. This allows us to put more money elsewhere.... like health insurance/health care.

good luck
Just work the whole budget as
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Old 08-11-2015, 06:26 PM   #4
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That ratio is referred to in the case of renters as well, and everything you mentioned save furniture would be in the number, imo. So apple and apples, the same costs would be numerator for owners as well.

Furniture is movable and not part of the building, and should have its own budget line someplace else. Decorating I would test by asking if it stays behind when you leave, its part of the building.
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Old 08-12-2015, 08:16 AM   #5
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Thanks for your answers. When I asked my CPA if I should pay of the mortgage, as part of my retirement panning and budgeting, he said I needed the tax write off of a mortgage.
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Old 08-12-2015, 09:17 AM   #6
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If this is a "should I pay off the mortgage?" question, I certainly wouldn't answer it with a rule-of-thumb rule for new borrowers.

Search this forum for threads with "mortgage" in the title and you'll find a number of discussions on that topic.
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Old 08-12-2015, 09:28 AM   #7
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If this is a "should I pay off the mortgage?" question, I certainly wouldn't answer it with a rule-of-thumb rule for new borrowers.

Search this forum for threads with "mortgage" in the title and you'll find a number of discussions on that topic.
No, I am not asking if I should pay off the mortgage, the CPA said don't do that because it will push us into a higher tax bracket.

Rather, I am trying to determine what percentage of my housing budget is taking up my total income stream in retirement and I read it shouldn't be over a third. This rule of thumb seems to be the same when discussed as renting, considering a mortgage or in retirement from what I have read. It's just that I can't figure out if it is "just" PITI?

So what factors constitute one's Housing Costs? However, when I research Housing Costs there's discrepancies among the experts as to if it is "just" PITI or do we include maintenance (fix the porch), replace a furnace, paint the living room, new tree planted, etc. I figured the folks here may know.
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Old 08-12-2015, 09:41 AM   #8
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For those who have paid off the mortgage (or even for those who haven't completely) how does one figure the "opportunity cost" of the invested housing money? I would think that could be significant though we all have to live someplace. Any thoughts?
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Old 08-12-2015, 09:54 AM   #9
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Originally Posted by pb4uski View Post
I think that 30% rule of thumb is what is used by mortgage lenders and includes principal, interest, taxes and insurance (aka PITI) and would not include maintenance, appliance replacements, decorating, furniture, etc. or even utilities. And it is measured in relation to income, not total expenses.

While I have never looked at that ratio, FWIW for us PITI is about 31% of total expenses and total housing costs (PITI + snow removal, maintenance, heating and electricity) is about 37%. Works for us.
Wow, that sure seems like a lot to me but then I am just a single person living in the South, so I would probably think differently in different circumstances. This struck me as a fun little computation so I just did it too.

Back in 2002 when I first bought the home that I am now selling, PITI was 18% of my income or less, so that plus substantial raises and promotions at work in the following years allowed me to pay it off at a faster rate and save for retirement. That was intentional and I thought of it as my "LBYM house".

I'll probably be spending a higher percentage too, now that I have moved into my more expensive "Dream House" with no mortgage and have retired with a lower income. I am curious to find out how high that percentage turns out to be for 2016!
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Old 08-12-2015, 10:03 AM   #10
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No, I am not asking if I should pay off the mortgage, the CPA said don't do that because it will push us into a higher tax bracket.

Rather, I am trying to determine what percentage of my housing budget is taking up my total income stream in retirement and I read it shouldn't be over a third. This rule of thumb seems to be the same when discussed as renting, considering a mortgage or in retirement from what I have read. It's just that I can't figure out if it is "just" PITI?

So what factors constitute one's Housing Costs? However, when I research Housing Costs there's discrepancies among the experts as to if it is "just" PITI or do we include maintenance (fix the porch), replace a furnace, paint the living room, new tree planted, etc. I figured the folks here may know.
Okay, I still would not use a "rule of the thumb" for planning. Use your own spending history and see what make sense for your situation.

If you want to see what other retirees are spending, I posted some data here: Consumer Expenditures Survey
You can find each of the items you've mentioned on this list and see how they relate to total spending.
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Old 08-12-2015, 10:22 AM   #11
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We have no mortgage, but housing cost is 26% of total expenses. I include the following: property tax, home insurance, a portion of umbrella insurance, maintenance, and utilities.

I do not include large, non-recurring items like home improvements, new furniture, new roof, etc. These are covered by the allowance or sinking fund for large, long-lived asset expenditures, same as car replacements. Most appliance replacements, decorating, etc are small enough, and regular enough, that they get absorbed into the ongoing maintenance category, which is part of the 26% figure.

I don't pay much attention to industry rules of thumb. We just allocate resources in whatever way makes us happy. Right now, the large house makes us happy, so we stay. At some point when we are no longer physically capable of upkeep, we will downsize, at which point, housing will drop to 15-17% of expenses.
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Old 08-12-2015, 11:01 AM   #12
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Since you are trying to estimate your retirement expenses, the rule of thumb used by lenders is not the right metric. Use the $'s you are paying for your mortgage, property tax, etc. Include ALL annual expenses that you will need to cover in retirement. Like Cobra9777, I set up a sinking fund for things that you know will have to be replaced at some point, but are not done every year (appliances, painting, etc.).

After you set up your spreadsheet, you can use the Consumer Expenditures Survey to sanity check you numbers. But don't worry too much about being too far from the norms on some items. The survey is just a guide. What's important is YOUR expenses.
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Old 08-12-2015, 01:40 PM   #13
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The old ROT for PITI was just to assess the likelihood of default by the borrower.

When you are retired, it is just a budget line item and you spend what is left. So if you live in the south and have owned your home for years, it has no bearing for someone who lives in California and still carries a mortgage.

We have friends who retired to Branson and have a huge home (e.g. 5-car garage) and a 5th wheel yet still spend less than they did in Wisconsin on a regular suburban home.
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Old 08-12-2015, 02:05 PM   #14
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Well, >60% of my expenses is housing.

Don't believe there is any set % that's 'right'. Just start from wants/needs and available resources, go from there.
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Old 08-13-2015, 02:02 AM   #15
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Well, >60% of my expenses is housing.

Don't believe there is any set % that's 'right'. Just start from wants/needs and available resources, go from there.
That seems very high, but I agree with your other statement. I would guess most retirees without big mortgages would pay 15-30% of total expenses on housing.
We include taxes, utilities, insurance, furniture expenditures, any property management, cost of travel to visit each place, art, extra cost of maintaining autos at each place,any repairs,etc. Total of these costs would be under 30% of total spending.
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Old 08-13-2015, 03:01 AM   #16
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My rent is 1.3k per month, including utilities.

Last count I was spending 0.8k per month roughly on everything else (includes food, healthcare, transportation, communications, insurance, clothes, entertainment, healthcare, gifts ..).

It is very skewed mostly because I spend a bit less on non-housing things than most others I know. And of course healthcare is subsidized here (Europe).

I've never been below 35% though.
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