NEW Retirement home: how to figure out how much to spend on it?

[Orchidflower]

When you retired--if you moved to a new home--how did you figure out how much to spend on the new house you purchased?

I recently was doing some research that suggested 30% of monies a retiree had was the rule of thumb (for retirees) to put down for their home. I have no clue as to how they came up with that one, so maybe someone can explain?

Since I'm basically conservative in the best of conditions--and I remember the big dump of monies I took in 2008 in the market--I bought way less than I could afford...but that's just me.

 

[SkisALot]

DH and I are looking for a new retirement home. The price we decided to pay is based on what we feel comfortably supporting (taxes, insurance, utilities for the size of the house, etc.).

 

[W2R]

When you retired--if you moved to a new home--how did you figure out how much to spend on the new house you purchased?

I recently was doing some research that suggested 30% of monies a retiree had was the rule of thumb (for retirees) to put down for their home. I have no clue as to how they came up with that one, so maybe someone can explain?

Since I'm basically conservative in the best of conditions--and I remember the big dump of monies I took in 2008 in the market--I bought way less than I could afford...but that's just me.

Orchidflower, it is always good to see your posts.

We are lucky that we remember the 2008 market crash, because it makes us think twice. I don't think a rule of thumb is a good idea. I think it would be better to figure out exactly what it will cost you, including any hidden costs, and how the absence of that money to spend on other things will affect your lifestyle.

Think about:

1. purchase price and closing costs on the new house
2. cost of remodeling and redecorating the home before you move in
3. principle required to generate enough income to cover increased property tax and insurance.
4. selling price of your present home, realtor fees, and any other closing costs on the old house
5. moving costs

Hope this helps! Are you thinking of moving to another state, or to another house in your present location?

 

[chilkoot]

Probably just one of many posters to make the following point:

Just finished paying off one house and I'm not eager to start all over again.

 

[photoguy]

I will probably move when we pull the plug. The way I think about this is that the house price is constrained by your SWR. I.e. you are in 1 of 2 situations

(1) Renting which is paid for by a chunk of your SWR
(2) Purchasing a home which lowers your portfolio, but also reduces rent expense (less home maintenance).

So for example I might mentally allocate 400k of my portfolio to housing. If I rent, I can afford 1k/month (at 3% SWR) or I could spend say $300k on a home (with 100k left to fund ongoing home maintenance,taxes, etc.).

 

[Orchidflower]

I had 3 days to buy, W2R, when I came to Phoenix and never had even been here before. My girlfriend talked me into this 55+ community thing which would be wonderful for someone else...but it just ain't me at all or, at least, this particular community isn't....but the house itself is great. At least, in the last 2 years 9 months it's gone up $37K so far and still moving up which is good news. And they go fast here, too, in this community. But too many couples, not enough singles.
So, plan to move in time to an area I found that is loaded with single, educated, retired folks across town. Son is with me now and headed to grad school, so have to factor that in also.
I really like Phoenix alot, tho, and am glad I chose here even tho it was a really rash, last minute decision...I got lucky on this one. There's alot to do here, many people live here from all over (lots of Michigan people for sure) and everybodys friendly.
My problems I'm so conservative that I always underbuy, so thought I'd better ask what others do. 30% of one's entire fortune put into a home seemed somewhat high to me....but what do I know? I'm too frugal sometimes.

 

[Semiretired2008]

To the best of my knowledge the 30% rule is what housing should cost from your gross annual income - not from you what you had in savings. In other words what the mortgage, taxes, expenses, etc. will cost annually to live in the home. It is kind of what the mortgage companies use when they are qualifying you for a loan... A good many retirees will not be carrying a mortgage so - definitely that would lower the percentage necessary for housing...

Unless I misunderstood the question...

 

[W2R]

I had 3 days to buy, W2R, when I came to Phoenix and never had even been here before. My girlfriend talked me into this 55+ community thing which would be wonderful for someone else...but it just ain't me at all or, at least, this particular community isn't....but the house itself is great. At least, in the last 2 years 9 months it's gone up $37K so far and still moving up which is good news. And they go fast here, too, in this community. But too many couples, not enough singles.
So, plan to move in time to an area I found that is loaded with single, educated, retired folks across town. Son is with me now and headed to grad school, so have to factor that in also.

That's great that your house value has gone up so much! Especially since the community doesn't sound like a good fit. An interstate move can cost a lot, but maybe your son can help with that, if you choose to move yourself instead of hiring professional movers.

Hopefully you have lots more time to choose your next home and community, now that you are retired.

I really like Phoenix alot, tho, and am glad I chose here even tho it was a really rash, last minute decision...I got lucky on this one. There's alot to do here, many people live here from all over (lots of Michigan people for sure) and everybodys friendly.
My problems I'm so conservative that I always underbuy, so thought I'd better ask what others do. 30% of one's entire fortune put into a home seemed somewhat high to me....but what do I know? I'm too frugal sometimes.

I don't know what most retirees prefer to spend on a home. It probably depends a lot on the cost of housing in the area, as well as nestegg size.

Personally I would be OK with a home valued at 10%-20% of my net worth, in New Orleans anyway. But 30%? Forget about it! No way would I feel comfortable spending that much. Besides, I don't need that much of a house since I prefer to live alone. I don't want the maintenance headaches of a bigger, more expensive house, either, at a time in our lives when so many people are thinking of downsizing.

 

[Katsmeow]

I think the point is not that you must spend 30% of your net worth on a house but that a lot of people can spend that much and will still have enough other assets that they aren't house poor.

So, if you have $1 million, then if you spend $300k for a house you still have $700k cash left if you paid cash for the house. Of course if you get a loan you have more cash left, but have to spend more each year since you have to pay the mortgage.

 

[Tom52]

We plan to relocate to another state when we RE. We do not consider the value of our current paid for home as part of our net worth calculation. When we relocate we expect to move to an area with lower property taxes and the price of the home we purchase will likely be no more than what we clear after the sale of our current home.

All taxes and maintenance costs on our future home will be covered by our planned retirement budget. As a reference our retirement home will be valued at approx. 15% of our net worth, but the home will not be included in our net worth calculation. Hope that makes sense.

 

[pb4uski]

Interesting question. 30% of your nestegg sounds like way too much and 30% "down" is downright crazy. Our house is less ~14% of our assets. Our decision was based on where we wanted to live and our lifestyle rather than a % of assets or anything like that.

You might look at it backwards. Start with your nestegg * the WR you are comfortable with + pension + SS to get your retirement income. Then multiply that income by 30% which is the typical hurdle used for PITI.

The compare the PITI of a house you like to the 30% of your retirement income. If the PITI is lower, then in theory you can "afford" more house (not that you have to buy more house). If the PITI exceeds 30% of income the I would be cautious as the house is more than what you could theoretically afford.

 

[eytonxav]

I suspect many retirees already owned a home free and clear prior to retiring and to that end, may look at the price of a home independently from their nest egg. For DW and I that is the case, but we would like to downsize to save extra $ in annual insurance, tax and maintenance expense and also have some $s left over for various other purposes (eg putting DD through grad school). That said, I have never heard of the 30% rule of thumb on what you should spend for a house as a retiree, as this is simply a function of what you can afford so as not to deplete your nest egg over your planned horizon and what you may want.

 

[R.O.A.D.]

Probably just one of many posters to make the following point:

Just finished paying off one house and I'm not eager to start all over again.

Great point. I'm not there yet but am fairly certain I would feel the same. I may consider selling and getting into something smaller at a lower cost.

 

[Independent]

I can't believe any rule of the thumb. It's like asking what percent you should spend on food. Some people are into basic food prepared at home, others like to eat in expensive restaurants. I'll buy a different mix of stuff than somebody else.

I'd look at how many dollars I can afford to spend in a year, and how I want to distribute them between food, housing, transportation, entertainment, etc.

Then, I'd add up TUMIR (Taxes, Utilities, Maintenance, Insurance, and Repairs), the ongoing costs of owning. Compare that to my current spending on those thing.

I'd look at switching costs - realtor's fees, moving expenses, overlap from owning two houses for a month or two, initial redecorating/repairs. That comes out of my nestegg and presumably reduces my safe withdrawal amounts forever.

Then, the direct purchase price of the house comes out of my nestegg, and reduces my safe withdrawal amounts as long as I own the house. (When/if I sell it and downsize, I expect to recover my purchase price, probably with inflation.)

So, I'd develop the numbers, sit and stare at them, decide if I need to cutback on something else to pay for the house, then make a gut decision based on my personal preferences.

 

[walkinwood]

Maybe you're starting at the wrong end. First, you need to decide how much house you need or want. Start from the cost of such a home in your desired neighborhood and work from there.

The one-time costs ( cost of the new home - sale price of old home + selling cost + moving + closing costs) are easily estimated and will tell you how much of your savings you'll have left & how much your annual budget would be.

Then, figure out the TUMIR (I like the acronym) and see if that would leave you enough to be comfortable & do the things you want to do

That's how I would do it.

We ploughed all the money we made on the old house (minus selling costs) into the new one. But we knew that TUMIR would be much lower, so we came out ahead. We took moving costs from our annual budget.

Take your time. All the best.

 

[Live And Learn]

I will be downsizing to a 1600 sq ft house in a 55+ community. The cost of the new house will be less than my fully paid off home but not by much (I'm figuring 20k because, like you, I am sometimes too conservative). The new house will cost approx 10% of my NW (excluding my current home value) and the homeownership costs (taxes, utilities, insurance) will be approx 18% of my budget.

My budget gives me 100% success for 40 years in FIRECalc (gets me to age 90) and 90% success to age 90 in FIDO's RIP.

 

[Cat-tirement]

Even though we have a few years to go before retirement, last year we decided where we want to retire. We recently bought a house there to take advantage of the real estate market depression before it goes back up. (We still ended up paying a bit more than our initial hope, but it's where we want to be.) We had payed off our current home a couple of years back, and don't intend to have a house payment once we actually retire, so that was our limiting factor in the new purchase rather than any particular percentage. Except for the down payment which I covered through a bit of appreciated stock (it was never part of our retirement portfolio), we expect to pay off the loan on the retirement house once we sell the current house. In the mean time, the mortgage is being paid by renters.

 

[Moemg]

Only advice I would offer is to go slowly and be sure this is the area you really think is right for you before you make the move . I would befriend a few people from the area so you could see if it's a right fit .

 

[Orchidflower]

A friend of mine told me he put his money in 2 cd's ($200K each = $400) and his house value is $307K, so looks like at least one person spent close to 30%+ of his total funds for his residence. Wonder how many people do that?

Personally, I spent 10% of my total for this house. I probably will take the monies I make on the current house and use it to purchase the condo--plus, the moving expense which should run I'm just guessing around $3-4K for movers to go across town. There is no way I could buy my house now for what I paid, and I'll be moving over to Scottsdale and even condos there I couldn't buy for what I paid for this house.

I'm taking my sweet time for this house to go up more since: they are renovating here and that should drive the price up; and the renovation won't be done until 2014 possibly--all this gives me time to sell stuff at consignment stores and on ebay = less to move.

BUT dang! there are times I just wish I could let 'er rip and hand that check over...and just buy that pricey item instead of being so darn conservative ALL the darn time! But I just can-not-do-it...

...And I will definitely be hanging out over there in that zip code and scouting it out alot before making any offers. I've done about all I can on the internet I think.

 

[daylatedollarshort]

I don't think there is a one size fits all answer on house price. I am looking forward to having a smaller house that needs less cleaning and upkeep and is less expensive to heat, cool, insure, pay taxes on and maintain. For us I think eventually we will want more time to travel and maybe take some extended trips, so a smaller house will leave us more money in the travel and savings budgets.

Thomas Stanley has a blog article on the benefits of buying an easily affordable house -

"One of the main reasons that [millionaires] are wealthy is that they live in an easily affordable home. I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. And today they have seven times more wealth [median] than their non millionaire neighbors. "

 

[Katsmeow]

As a reference our retirement home will be valued at approx. 15% of our net worth, but the home will not be included in our net worth calculation. Hope that makes sense.

I would suggest that your home is most certainly part of your net worth. It is an asset which has a value. However, I would suggest that most would not consider the value of the home as part of your portfolio.

That is, yes, equity in a home is part of net worth. However, in determining a withdrawal rate for a portfolio I would not include the equity of the home.

 

[imoldernu]

An additional concern that might affect the purchase value...
Married?
Consider the home value as a reserve in case of one spouse requiring long term care and depleting the retirement assets. The surviving spouse may remain in the home with medicaid taking over nursing home payments. in most cases, upon the death of the other, the surviving spouse may keep the house up to reasonable limits. Renting does not provide this "reserve". A five year "lookback" is the qualifier.