4 Ways Retirees Can Avoid Being ‘House Poor’
Written by
Andrew Lisa
Edited by
Jenna Klaverweiden
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Homeownership can be the foundation of wealth building — but not for those who own too much house.
According to a LendingTree study, 18 million homeowners across America are “house poor,” meaning they’re burdened with housing costs greater than 30% of their income.
Retirees are especially vulnerable to the dangerous consequences of being house poor, but the good news for seniors on a fixed income is that many of them have the power to avoid this or even fix it.
Here’s what you can do to join the millions of retirees who shrunk their housing costs to match their post-career budgets and avoided being house poor in their golden years.
Pursue Housing That Leaves You $3 Out of $4
A Fidelity study found that housing costs tend to fall with age, from an average of $22,572 per year between 55 and 64 to $19,623 between 65 and 74, and then to $17,286 at 75 and beyond. It’s not magic. Average housing costs decrease the further people get into retirement because many retired homeowners take proactive steps to lower their housing costs and avoid becoming house poor.
“Average housing costs drop over time among retirees, as many downsize, move to cheaper parts of the country (or world), or find other creative ways to trim housing costs or pay off their mortgage,” per Fidelity.
Most expert sources recommend that retirees cap their housing costs at a maximum of 30% of their income, but 25% would leave them much more wiggle room. However, Bureau of Labor Statistics data shows that the average retiree household spends 35% of its income on housing, a few percentage points more than all U.S. households overall.
If you fall into that category, join the seniors who downsized, refinanced, moved to a cheaper location or took other actions to reduce their housing costs from $1 in every $3 they earn to $1 in $4 they earn.
Calculate All Potential Housing Costs
Some retirees are already house poor and must get creative in lowering their housing costs to wiggle free. If you’re considering relocating or buying closer to home, you’re in luck. You can avoid following their path by not overfinancing in the first place.
According to Rocket Mortgage, avoiding this starts with a thorough assessment of housing costs that considers all upfront and ongoing expenses, which include the following:
- Down payment
- Closing costs
- Finance charges
- Maintenance and repairs (usually 1% to 3% of the home’s value annually)
- Property taxes
- Insurance
- Utilities
- Garbage and sewer services
- Homeowners association fees
- Landscaping and snow removal
- Transportation
- Real estate transaction fees.
Expect Costs To Rise — They Always Do
With a traditional fixed mortgage, you lock in your interest rate for the life of the loan — but that doesn’t mean your monthly payment will stay the same. If it’s bundled with your insurance and property taxes, as most mortgages are, your monthly obligation will inevitably rise.
“Home insurance will increase in price as time goes on simply because inflation makes everything more expensive,” said Melanie Musson of InsuranceProviders.com. “Just because you don’t have to think about home insurance once you have it set up and included in your escrow doesn’t mean you shouldn’t think about it. Spend some time comparing quotes and see if you could save hundreds of dollars a year by switching to another company.”
As with insurance, Musson said property taxes will invariably rise with time.
“But unlike insurance, there’s not much you can do about it,” she said. “So, plan for the increases when you’re preparing for retirement so you can make sure you save enough. If you’re already retired, you may need to look for ways you can save money to help balance the extra costs of taxes.”
Build an Emergency Fund and Plan For Lower Income
Retirees typically require less income than they did while they were working, but most also earn less income too. If you’re still working but planning to retire in the near future, don’t finance your retirement home based on what you’re making now or what you hope your nest egg will provide — and forget what the bank approves you for.
Instead, you should borrow based on the realities of your retirement savings measured against your projected expenses. If you’ll be living on a fixed income, keep in mind that inflation will erode your buying power over time — even with Social Security cost of living adjustments — while your healthcare expenses will likely rise simultaneously.
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