One fact in yesterday’s post really jumped out at me: That in the UK study, “homeowners who have paid off their mortgages are in the best position (to survive a financial meltdown), able to last for 426 days before exhausting their reserves, while those with a mortgage would have just 22 days before their money disappeared.” In the phone call that occasioned yesterday’s post, Henry told me that of all his co-workers, he is the only one who lives alone. All the others either have roommates to share their housing expenses or live at home with their parents.
These facts sent me off to the Internet to confirm what I already knew but had never thought much about: That housing expenses—mortgages, property taxes, insurance, utilities, home maintenance, and the like—comprise the largest spending category for most people.
When you’re looking for a place to live, one number rules your world: You should spend no more than 30% of your income on housing. You have probably heard that rule-of-thumb from a financial adviser or parent, a landlord, or lender. It’s embedded in online budget calculators and federal policies. There’s just one problem: It’s essentially an arbitrary number. Says David Bieri, an assistant professor at the University of Michigan: “It creates more distortions than it actually solves.”
If the 30% rule ever made sense—which economists contest—it’s almost meaningless now, when almost 41 million US households spend more. Income growth has been tepid or worse, yet home prices are rising and rents have soared, threatening to make cities from Austin to New York unaffordable for average earners. And cities are where the jobs are, and culture and entertainment, too. The cost of housing is more than it seems on the surface: it is the cost of access to a whole way of life, jobs, and amenities not available out here in the sticks.
That housing is the biggest monthly expense for most people becomes more apparent when you look at the situation of seniors and others who are living on fixed incomes. A study by AARP and Harvard’s Joint Center for Housing Studies found that one in three Americans older than 50 faced a severe or moderate housing burden in 2012. That’s up from one in four in 2000.
Renters have it tougher. Nearly one-third of renters already pay more than half of their income on housing.
It’s become fashionable these days for advisers to warn retirees and pre-retirees to set aside enough money to pay for health care in their golden years. But people might be better served if they were told to make sure they first have enough income and assets to pay for housing and home-related expenses after age 65. That’s because those expenses comprise the largest spending category for older Americans, according to a report published last year by the Employee Benefit Research Institute (EBRI), a private, nonpartisan, nonprofit research institute based in Washington DC.
The dollar amount spent on housing and home-related expenses decreases slightly with age. But the share of these costs in household budgets remain stable at between 40% to 45%, depending on age group. Households age 60-64 spent on average $18,720 or 43% of total expenses on housing in 2011, adjusted for 2013 dollars; households age 65-74 spent $14,732 or 42%; and households age 75-plus spent $13,111 or 44%. Or put another way: you’ll need roughly $250,000 set aside at age 65 to pay for 20 years of housing expenses.
To be fair, EBRI found in its analysis that health expenses do increase steadily with age. In 2011, for instance, households with at least one member between ages 50‒64 spent 8% of their total budget (or $4,176) on health items, compared with 19% (or $6,603) for those age 85 or over. And health-related expenses occupy the second-largest share of total expenditure for those over age 75.
Studies show that almost 90% of older adults want to age in place—that is, stay in the home and the community where they now live. But by age 85, more than two-thirds of individuals have some type of disability that makes aging in place less practical or more costly.
The typical homeowner aged 65 and over has enough wealth to cover nursing home costs for 42 months. In contrast, the median older renter cannot afford even one month in a nursing home.
Housing is the cost no one is really talking about. So what do we do about it?
Obviously the solution for all of us of limited means is to lower our housing costs. In some locations, the government has stepped in with various programs and tools—rental assistance, expanded use of technology and services to modify their homes, more services delivered at home and communities that promote independence but prevent isolation—but these are not universally available and are directed primarily to poor people and older adults.
Letting people go homeless is no solution, either. I read a report that says the cost of providing “supportive housing” in Los Angeles CA is actually less than public costs of homelessness. The typical public cost for residents in supportive housing is $605 a month. The typical public cost for similar homeless persons is $2,897, five times greater than those that are housed.
No, we need to lower the costs of housing in all of our budgets, old and young alike.
Many people would prefer to retire without a mortgage. At the moment, however, nearly a third of households age 65 and older are retired with a mortgage. You can substantially reduce the share of housing costs by paying off your mortgage before you retire. The best time to start this is when you are young.
When I was first married, Holly’s grandfather offered a piece of advice I wished I’d taken. He advised me to pay off my mortgage before I did anything else. At the time, I dismissed his counsel as too “old school” and stepped onto the treadmill and began making improvements on our home through debt financing before we could afford those improvements out of current income and savings. Big mistake. Once you step onto that treadmill, you can rarely get off without a bump.
Downsizing can be an important way to both create some additional money that can be used to fund retirement, as well as have a home that is easier to maintain. It’s nice having a large house if you have a large family, but once the kids move out it can be difficult and expensive to keep larger homes going. Downsizing to homes with lower taxes, lower utility bills and in need of fewer repairs helps.
If downsizing isn’t in the cards, you can always consider a reverse mortgage. A reverse mortgage is one way someone can use their home as an asset to fund retirement, but there are good reasons for not doing it. The fees associated with reverse mortgages can be high and is something a retiree needs to be aware of when considering this option. A reverse mortgage might be a less popular option for other reasons too, such as loss of ownership.
One of the reasons I moved to West Texas was the lower housing costs. It meant moving from a highly-leveraged home valued at over $400,000 into a property that could be paid off in seven years, even on Social Security. I have only two years yet to pay, maybe less. At the same time, I have preserved those aspects of life that are important to me. But those things do not carry the huge price-tag I was paying in Minneapolis.
Downsizing was the best solution for me. Helping others was one of the things I wanted to preserve from my old life. And it seems to me that helping others who are just starting off to eliminate the costs of housing is a benefit that is not inconsequential.
This is a long way of explaining my thoughts behind the creation of Estrella Vista.
Groove of the Day