When you picture retirement, what do you imagine your biggest expense will be? If you’re like most Americans, you probably thought of rising healthcare costs. And while healthcare should be a consideration, housing will likely be your biggest expense throughout your entire retirement.

According to the Social Security Administration, housing accounted for 35% of all household spending of Americans aged 65 and older, while out-of-pocket medical expenses accounted for 10-15% depending on age. Note that this is just an estimate based on all retirees – if you’re in a lower income bracket, for example, the percentage of your income going to housing is likely even higher.

This is why having a plan for your housing expenses in retirement is crucial. Where you live plays an important role not only in your finances, but also your happiness, and should be a priority when discussing your retirement plan with your financial planner.

In this article, we’re going to discuss some of the major considerations for both homeowners and renters as you think about how your housing is going to change in retirement.

If you’re a homeowner

Homeowners have a lot to consider when it comes to retirement housing, but it usually comes down to one big question: do I stay in my current home or do I move?

Many retirees decide to stay in their homes, at least as long as they’re physically able to. On the surface, this seems like the easy option. You know this home and its quirks, understand its regular expenses, and is close to your life as you know it.

But as you get older, your housing needs change. You don’t need a big family home with multiple bedrooms that is expensive to maintain. You might want something smaller, cheaper, and easier to navigate. This could mean buying a smaller home, or deciding to rent instead.

You might also decide to relocate to be closer to family or population centers – living in a rural area might be great in your fifties, but isolating in your seventies. Retirement communities are also purpose-built to help combat many of these issues. They come with a built-in social structure, and they also have many features that older people need, such as hand-rails and grab-bars in the bathroom, extra wide hallways, and single-story designs.

It might also make sense to move in with family, like your children and grandchildren. Multi-generational living can have a hugely positive impact on everyone – grandparents see improved mental and physical well-being, parents get help with caregiving, and children can even see an increase in school performance. If you’re planning on giving your children your house as part of your legacy plan, it might make sense to have them move in now, instead of waiting until you die.

It’s important to look at how your house figures into your financial plan as well. For many homeowners, their home is their biggest asset. If you’re underfunded in retirement, homeownership gives you a lot of options for tackling that. For example, you could sell your home and rent. You would no longer have to deal with property taxes and maintenance costs would probably go down. You’ll also have more flexibility when it comes to downsizing over time.

If you want to stay in your home, you could use a reverse mortgage or HELOC to tap into the value of your home to help pay for other expenses. This can help you get some liquidity out of your home while still keeping it as an asset to pass on to family.

A reverse mortgage allows you to borrow money using your home as the security on the loan, but unlike a traditional mortgage, you don’t make monthly payments. Instead, interest and fees are added to the loan balance each month, thus increasing the amount you owe. A home equity line of credit (HELOC) works a little differently. Instead of getting a loan for a fixed amount, the lender promises to advance you up to a certain amount, which you can draw for a particular period (usually five to ten years) before the repayment period starts. Neither a reverse mortgage or HELOC is free money – any amount you borrow must be repaid.

If you’re planning on staying in your current home, repaying your mortgage should be considered a priority. According to a Harvard study from 2019, American homeowners over 65 with no mortgage paid an average of $458 in monthly housing costs, while those with mortgages paid $1310. Renters, on the other hand, paid $830.

Questions to ask yourself

Homeowners, here are a few questions to ask yourself to help kick off this process:

How many spare bedrooms do you have in your home? How much are you spending on home maintenance in a year? Is your house mobility-friendly, or can you afford renovations to make it more mobility-friendly? Do you live close to friends or family? Do you live in your current location because it’s convenient for a job you will no longer have? Are there public transportation options near you? Do you still have a mortgage? Do you need more liquid assets?

Think about your answers, and contact a Certified Financial Planner to discuss further in the context of your overall financial plan.

If you’re a renter

Renters and homeowners struggle with the same main question – do I stay in my current home or do I move? – but renters have much more flexibility when it comes to where they live. Renters can more easily move without having a major asset tied up in the housing market, which only becomes more important as you get older and need to react to a changing lifestyle.

On the downside, renters often don’t have the same flexibility when it comes to their finances. Studies from 2016 show that the average homeowner aged 65 and up had a net wealth of $319,200, compared to $6,700 for renters at the same age. And while renters can’t tap into what is often a major asset – the home – to help make up for an underfunded retirement, they can more easily downsize their home to fit what they can afford.

Beyond finances, homeowners and renters will consider many of the same issues, such as downsizing to a home with less bedrooms, or to a home that’s more mobility-friendly, or to a new location that’s closer to social networks and family or to public transit and amenities like shops and medical centers. Multi-generational living can also make a lot of sense for renters, whether your children are homeowners or renters themselves.

Questions to ask yourself

Renters, here are a few questions to ask yourself to help kick off this process:

Do you need all of the space in your current home? Can you afford my current housing expenses with your retirement income? Is your current home mobility-friendly? Do you live close to friends and family? Do you live close to public transit and other amenities?

Think about your answers, and contact a Certified Financial Planner to discuss further in the context of your overall financial plan.

Bottom Line

Whether you’re a homeowner or renter, your housing is going to play a huge role in your happiness in retirement. It can also make a big impact on your overall financial picture, especially if you have limited retirement income or are underfunded for retirement. Housing should be a priority when discussing your retirement plan with your financial planner. Do some thinking about what you want out of your home – not just financially, but personally and socially – before you talk to a financial planner, so that you’re ready to think through some of the implications behind these big decisions.

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