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Can You Afford a Mortgage in Retirement?

Sep 05, 2018 3 min read Kate Ashford

Key Takeaways

  • Your retirement budget should reflect your desired lifestyle, including housing.
  • A smaller mortgage might give you more financial breathing room.
  • Plan for unexpected expenses to avoid disrupting your retirement.


Once upon a time, people bought one house and paid it off well before they retired. Today, it's more common for people to move in the decades approaching retirement, carrying a mortgage into their post-working years.

In fact, 44% of retirees age 60 to 70 have mortgages, according to a 2017 study from American Financing Opens in new window. And 32% believe they'll need more than eight years to pay it off.

 


But a mortgage can affect a variety of items, from your cash flow to taxes in retirement. You'll need to know how to budget for a house, and you may even be wondering if you can get a mortgage if you are retired. (You can.) If you're asking yourself, “Can I afford a mortgage in retirement?" here are some pointers.


Include a home payment in budget

Taking your mortgage into retirement requires running a different set of numbers . Not only will your income change, but your expenses will, too. For example, you won't be commuting for work, and you won't have to invest in a work wardrobe. But there are other costs to consider, such as travel to visit family or see new places, and new hobbies you might want to take up now that you have more free time. And, of course, there's health care, which is a significant outlay. (AARP has a calculator Opens in new window to help you consider your health care costs.)

If you were planning a mortgage-free retirement, throwing that monthly payment into the equation can make a big dent in your spending plans. Ponder whether you'll still be able to do the things you'd hoped to do, or whether carrying a house payment will force you to curtail some hobbies — or work longer to make it all possible.

Many personal finance experts will say you should be able to get by on any income you receive plus withdrawal of about 4% of your retirement portfolio. Make sure that's still possible even with a mortgage on the balance sheet.


Weigh the pros and cons of a mortgage

Depending on where you live, tax law changes may make it less desirable to have a mortgage in retirement. Because the standard deduction has doubled under the tax overhaul passed in 2017, you may not benefit as much from a mortgage interest deduction if you don't have enough deductions to itemize on your taxes.

And if you live in a state with high state and local taxes, owning a home may be more expensive now that there's a cap on state and local tax deductions.

That said, if you're thinking of taking assets out of a retirement account or other investments to pay off your mortgage, that also may not be the best approach. Historically, other investments can earn more than real estate over the long term, and they're far more flexible — so if you need to pull money out to cover an unexpected event, it's easier to do it from an investment account.

It's worthwhile to sit down with your financial or tax professional to determine how the new tax system will affect you in retirement.
 

Consider the alternatives

Retirement is often a time when people make a change, whether it's moving, downsizing or renting. Home ownership comes along with a variety of expenses — property taxes, homeowners insurance, maintenance costs and other fees. Downsizing generally comes with lower costs, and renting can be less expensive, depending on the market.

When you think about how you want to spend the last few decades of your life, what are you imagining? It may be that, even if your budget can support the mortgage and expense of your new home, it's not the retirement lifestyle you want.

Then again, maybe you'll be happy in the big house with the huge yard for the first 10 years of retirement, and then decide to settle into a smaller condo. There are often new tax system that are reflected in different levels of spending and expenses.


Retirement is unpredictable

For all the planning you do, sometimes the worst happens. Around one in five retirees (19%) have experienced four or more shocks during retirement, where a “shock" could be the death of a spouse or entry to a long-term care facility, according to one study Opens in new window. (Tops on the list were home repairs and dental expenses.)

It's key that these events don't derail your retirement budget. Experts suggest setting aside funds each year (and creating room in your budget) for surprise expenses. That way you aren't forced to withdraw more from your retirement funds than you'd planned.

 

What you can do next

Map out your retirement and associated expenses with your financial planner. Explore whether you want to stay in your current home or downsize . You can start with a retirement calculator to determine if you're working with the right numbers.

 

Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others.

 

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