MONEY early retirement

The Most Important Move to Make If You Want to Retire Early

Small birdhouse
Michael Blann—Getty Images

Housing is the most dangerous expense for those seeking financial freedom. Here's what you can do to control those costs.

Looking to achieve financial independence and retire sooner? A top priority should be to control expenses—especially your major living expenses like housing, food, transportation, health care, and recreation. We’ll focus on the rest of these spending categories in future columns, but for now let’s take a look at housing—the single largest expense for many, and one that can all too easily sabotage your journey to financial freedom.

Housing-related decisions will impact your financial independence by years, if not decades. Homes are a downright dangerous expense variable, because price tags are high, leverage (borrowing) is usually required, and various financial “experts” with their own agendas are usually involved. And houses expose our vanities, tempting us to spend for the approval of others, instead of in our own best interests. Losses of tens of thousands of dollars are routine in real estate, and can completely derail your savings plan.

Even when you don’t suffer an outright loss, changing homes is expensive. I moved around in my 20’s, had few possessions, and rented, so the cost of relocating was minimal. Then I married, we bought our first house, and had a child. Our next move was punishing: We were forced to sell our house at a steep loss, and, because of all our new stuff, we had to hire professional movers for the first time. When we finally bought a house again, we stayed put for nearly 17 years. In retrospect, that long time in one place was an enormous help in growing our assets and retiring early.

How much does it cost to change homes? By the time you add up the costs of selling, relocating, buying again, and settling in, you can easily spend $20,000, or more. According to Zillow, closing costs to a home buyer run from 2% to 5% of the purchase price. The seller doesn’t have mortgage-related costs but is likely paying a realtor commission as high as 6% or 7%. Then there are moving costs, and the inevitable shakedown costs with any new home: painting, carpets and curtains, repairs, supplies and furnishings, and basic improvements to suit your lifestyle.

In short, changing homes is frightfully expensive, and will probably eat up most of the average family’s potential savings for several years running.

Of course there are scenarios like career moves, where you don’t have the luxury of staying in place. But anytime the choice to move is yours, stop and consider the expenses. The worst possible choice would be an optional move into a larger house that you don’t really need. You are taking on a big one-time expense, plus a bigger ongoing mortgage and maintenance obligation. If more space is truly necessary, consider instead modifying your current home: When our son reached the later teen years, we renovated a larger downstairs room so he could have more space.

Once you’re in your home, be smart about home improvement projects, especially those you can’t do cheaply yourself. Trying to create the “perfect” home is an uphill battle, at best. Borrowing to improve your home is an especially bad idea, in my opinion. You can spend vast sums of money without measurably improving your quality of life. And old assumptions about getting that money back when you sell are outdated. For 2014, Remodeling Magazine reports that the average cost-value ratio for 35 representative home improvement projects stood at just about 66%. In other words, you don’t make money when you sell: rather, you only get about two-thirds of your money back! Financially speaking, that’s a lousy investment.

Lastly, while there are situations where it makes sense, on paper, to hold a mortgage, for those truly dedicated to financial independence, the disadvantages of debt often outweigh the benefits. In general, pay off your mortgage as soon as possible. Using extra income to pay down a mortgage loan can be a solid investment in today’s low-return environment. We paid off our mortgage years before retiring, and the peace of mind was invaluable. Now, in retirement, we rent instead of own. It’s a flexible, economical, and low-hassle lifestyle.

In short, maintaining a home will be one of your largest life expenses. Pay careful attention to your housing decisions if you’re serious about financial freedom!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

More from Darrow Kirkpatrick:

The Single Most Important Thing You Can Do to Achieve Financial Success

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

Read next: 3 Little Mistakes That Can Sink Your Retirement

MONEY Aging

The One Thing You Need to Get Right for a Secure Retirement

walkable community
Getty Images

As Baby Boomers reach retirement, they need to make sure their homes and communities are age-friendly, a new report finds.

The biggest threat to your retirement security may be the home you live in, according to a study out today by the Harvard Joint Center for Housing Studies and AARP Foundation.

Your home and its location has an enormous—but often overlooked—impact on your quality of life and financial security in retirement, a problem that will only grow worse as the population of people ages 50 and older surges, according to the report. The number of people over 50 will climb to 133 million in the next 15 years, up more than 70% since 2000.

“Recognizing the implications of this profound demographic shift and taking immediate steps to address these issues is vital to our national standard of living,” says Chris Herbert, acting managing director of the Harvard Joint Center for Housing Studies.

For older adults, their home is typically their single largest expense. One-third of people 50 and older and nearly 40% of people over 80 pay more than one-third of their income for housing, including mortgage or rent. But even if your mortgage is paid off, routine expenses such as maintenance, insurance and property taxes account for a big chunk of your budget.

Despite the costs, most people want to remain in their homes as they age—73% of people 45 and older say they would like to stay in their current residence as long as possible, an AARP survey found. And 67% say they want to remain in the same community. Yet most homes aren’t equipped with basic adaptions that would allow people to remain there as they grow older, such as no-step entry ways or lever-style handles on doors and faucets for easy opening.

Another looming problem is lack of transportation. A majority of older adults live in car-dependent suburban or rural locations, which can isolate them from friends and family. By contrast, seniors in areas that allow them to walk to the store or grab a bus, as well as receive services if necessary, are far better off.

Younger Baby Boomers, those now in their 50s, are particularly at risk for being stuck in housing that won’t work as they age. They have lower incomes and more debt than previous generations—three-quarters of homeowners age 50-64 were still paying off mortgages in 2010, up 12 percentage points from 1992. Younger Baby Boomers are also less likely to be parents: 16% of the youngest baby boomers, age 50 to 59, don’t have children who can take care of them in their older years.

The Harvard/AAARP report calls for federal, state and community-based programs, such as expanding housing, transportation options and senior services, to tackle the problem. But government-based changes, especially ones that need substantial funding, will be slow to materialize.

Even if you’re healthy now, the odds that you’ll need some kind of care grow the longer you live. By age 85, more than two in three adults have at least one disability, including cognitive, mobility or vision problems. Here are several moves to consider now that will help you live comfortably in your later years:

Retrofit your home now. If you want to remain in your current home once you retire, adapt it so it is easier to get around. For example, if your house has a lot of stairs, add a master suite or a full bathroom to the main level so you can live on one floor. Do it while you have the income coming in to pay the costs, as well as the energy to oversee a renovation. You can find guides to age-friendly remodeling projects at AARP’s Livable Communities site and advice at The National Aging in Place Council.

Downsize to a more manageable space. A smaller home or condo will give you less lawn and home to care for, as well as lower your tax, maintenance and insurance costs. There are also many new options for retirement housing are popping up around the country. Co-housing, for example, is a standalone residence linked to a shared space, such as a yard or community room where you can cook and enjoy meals with other residents of the community. House sharing, where a friend, family member or tenant moves in and helps with chores and expenses, is another alternative to consider.

Move to a senior-friendly area. Though few people have traditionally moved in retirement, Baby Boomers are more willing to relocate. Nearly 30% of boomers plan to move when they retire, another AARP survey found. For many, relocating can be a smart way to cut expenses, especially if you move to an area with lower or no taxes and a cheaper cost of living. Look for places with good public transportation, plentiful senior services and walkable areas. For useful resources, check out the list of 31 places AARP is working with to create age-friendly places, a Milken Institute report on senior-friendly big and small cities, and MONEY’s Best Places to Retire.

Make sure you have a strong network. Whether you move or stay put, having a solid network of family and friends is invaluable. The Department of Health and Human Services provides a National Caregiver Support program through the Administration on Aging.

MONEY working in retirement

How to Find Happiness in Your Second Career—and Earn Money Too

These days, the retirement-planning conversation goes something like this: How can I earn an income after my initial career and give back at the same time?

This article was originally published at NextAvenue.org.

Cindy Lennartson is a 48-year-old library specialist at the University of Texas Libraries, in Austin. She has worked for a university library system for 25 years and is excited about retiring from there at 52 (when she can collect her pension) to start her next career. But she’s not quite sure how to do it.

After Lennartson read my inaugural column on rethinking retirement, “Why I’m Not Buying the Retirement Gloom,” she emailed me for insights on how she might make, and embrace, a life transition. I’ll offer them, as well as advice for others contemplating their move into “unretirement,” shortly.

The Lure of Trying Something New

To find out more about Lennartson’s situation and the future she envisions, I spoke with her. She told me that she’s a recently divorced mother of three who has loved her job and, until a few years ago, believed she’d retire at 62. But the lure of trying something new has convinced Lennartson to start reimagining her next chapter.

(MORE: Busting the Myths About Work in Retirement)

With her new plan of “retiring” at 52 when her children are out of the house, Lennartson said, she can use the next four years to find an encore career that will be meaningful and will come with a paycheck. “I’m rethinking the whole retirement thing — what else do I want to do,” she says. “I’m in the exploratory stage.”

Lennartson is far from alone. For more than three decades, the national conversation among people contemplating retirement was dominated by the haunting question: What is my number? Of course, the sum of savings we’ll need to live comfortably when we’re no longer working is disconcertingly uncertain. There’s no way of knowing what the market will return, let alone how much money will be enough to fund a lifestyle and medical bills.

The New Retirement Question

That’s why, these days, the retirement-planning conversation is increasingly focused on a different question: How can I earn an income after my initial career and give back at the same time?

Recent polls have found that most boomers expect to earn a paycheck during retirement. For example, 72% of pre-retirees age 50 and over just surveyed by Merrill Lynch and the Age Wave consulting firm said they want to work during the traditional retirement years. (You can read more about the survey in the Merrill Lynch report: Work in Retirement: Myths and Motivations, Career Reinventions and the New Retirement Workscape.)

What I found particularly striking in that survey was that many of the respondents said they see retirement “as a chance to try something new and even pursue careers dreams they were unable to explore during their pre-retirement years,” according to the report.

(MORE: Bright Spots and Challenges of Growing Older)

The Payback for Working in Retirement

The personal financial return from earning even a slim paycheck well into the traditional retirement years is big.

Your savings can continue compounding and you’ll live off your accumulated assets for a shorter period of time. A job can also allow you to delay filing for Social Security. Benefits are more than 75 percent higher if you start claiming at age 70 than at 63.

The difficult issue, as Lennartson has discovered, is figuring out what to do next — locating a paying gig that is also engaging.

Lennartson is smart to have a four-year exploration horizon and I encourage you to do the same. “You should be looking for the kind of jobs you could do that are challenging and interesting and offer an acceptable income,” says Arthur Koff, the septuagenarian founder of Retired Brains, an online job and advice portal. “The time to do it is while you’re working.”

(MORE: Change Careers With the ‘Sugar Grain’ Principle)

Why Planning Ahead Can Help

Making inroads before you retire can also help make you more valuable in retirement, as Jake Warner, the founder of Nolo.com, the self-help legal publisher explained to me.

“Let’s say someone thinks of themself as an environmentalist and dreams about working in environmental causes when they retire. But because of work, saving money, raising kids — all the pressures of daily life — they don’t get engaged,” said Warner. “Now they’re 70 and they have time. They head toward an environmental group they admire and say, ‘Here I am. How can I help you?’ The answer is going to be probably not much. Now, take that same person who gets involved with several local environmental groups in their 40s or 50s. At age 70, they’re valued and they’re needed. They earned it.”

The Librarian’s Encore Career

What might Lennartson do for her encore career? Well, she currently volunteers at a nonprofit, recording incarcerated fathers reading to their children and that’s an activity she finds deeply fulfilling. Perhaps there’s a paying job for her with the nonprofit or a similar endeavor.

Alternatively, since her undergraduate degree was in Spanish, she could try to land a job that would let her use her language skills.

Whatever she decides, a part-time gig would probably be best, since Lennartson wants the freedom to travel with her daughter, an activity they enjoy doing together.

Part of the equation revolves around her finances.

Running the Numbers

Lennartson had initially thought she would keep her house in retirement so her children would have a bedroom to come back to. Now, with her new next chapter mindset, she wonders if maybe just a couch is enough. A move into a smaller place would lower her expenses, giving her greater financial freedom.

Henry “Bud” Hebeler, founder of the retirement planning website Analyzenow.com, recommends Lennartson run the numbers to see how much downsizing will boost her cash flow. (That’s a useful site for anyone over 50 noodling a next act.) When she gets closer to making a shift, Lennartson could run her financial blueprint by a professional planner, he says.

As Lennartson is finding, transitions can be tricky and the process takes time. But they’re also liberating. “I feel like I am in college, so much is open to me,” says Lennartson. “It’s like I’m 21 or 22 once again,” she says. Now, that’s exciting.

Chris Farrell is economics editor for APM’s Marketplace Money, a syndicated personal finance program, and author of the forthcoming Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He will be writing on Unretirement twice a month, focusing on the personal finance and entrepreneurial start-up implications and the lessons people learn as they search for meaning and income. Tell Chris about your experiences so he can address your questions in future columns. Send your queries to him a tcfarrell@mpr.org. His twitter address is @cfarrellecon.

MONEY

Are Baby Boomers Downsizing Into Condos? Not So Fast.

Baby Boomers talk about downsizing but apparently don't do it. Trulia's economist says the long-term trend among older households shows downsizing getting rarer and happening later in life.

Throughout the recession and recovery, Millennials have hogged the attention: they suffered a particularly bad recession, which delayed their launch into the housing market, slowed overall household formation, and lowered first-time homeownership. But they’re hardly the only demographic that matters for housing. Baby Boomers will help determine the demand for different types of housing and the supply of homes for sale when – and if – they downsize.

This morning, Fannie Mae released a note on boomer downsizing, showing that the share of baby boomers in single-family detached homes has been roughly stable from 2006-2012 (rising slightly on a per-capita basis and falling slightly in the most recent years on a per-household basis). The big question is what happens longer term: are we about to hit a wave of baby boomers selling their single-family homes and moving into apartments and condos? It’s unlikely, for two reasons: baby boomers are still years away from the age of downsizing, and the long-term trend shows that older households today are less likely to downsize than older adults in the past.

Let’s start by looking at the age when older households move from single-family homes to multi-unit buildings. Based on the 2013 Current Population Survey’s Annual Social and Economic Supplement (CPS ASEC) – the most recent detailed demographic data available – baby boomers (born between 1946 and 1964, which means 50-68 years old in 2014) are less likely than almost any other age group to live in multi-unit buildings as opposed to single-family homes. The only age group less likely to live in multi-unit buildings is 70-74 year-olds, which is the age group that baby boomers will start to enter in the coming years.

In later years, the share of households in multi-unit buildings rises, but by less than you might guess. Just 25% of households headed by 80-84 year-olds live in multi-unit buildings – which is a lower share than 40-44 year-olds. Even among households headed by adults aged 85 and older, only one-third live in multi-unit buildings – and that’s only counting those who head their own household are not living with adult children or in institutions.

Therefore, as today’s baby boomers age, they’ll grow into age groups first with a lower likelihood of living in multi-unit buildings (70-74 year-olds). Multi-unit living starts rising slightly at age 75-79, and rises more notably only when heads of household reach their 80s.

But will baby boomers, who are in their 50s and 60s today, look like today’s 60- and 70-somethings ten years from now – or will they make different housing decision as they age? One clue is to look at the longer-term trend in multi-unit living among older age groups using CPS ASEC data back to 1979 (no data are available for 1988). The share of households headed by 50-69 year-olds – roughly the age of baby boomers today – living in multi-unit buildings rose to 21.3% in 2012 and 21.6% in 2013, after holding steady in the 19-21% range for decades. Therefore, baby boomers today are a bit more likely than their parents to live in multi-unit buildings instead of single-family homes. It’s too soon to tell whether that increase is a temporary effect of the recession or the beginning of a longer-term trend.

The clearer long-term trend, though, is the decline in multi-unit living at the ages that baby boomers are approaching. The share of age-70-plus households living in multi-unit buildings has been dropping for decades, from over 30% in 1980 to under 25% in recent years. That means that even if the recent uptick in multi-unit living among 50-69 year-olds persists, baby boomers are entering an age group that is less likely to live in multi-unit buildings than their own parents did two or three decades earlier. While the cyclical effect of the recession might hasten downsizing for some boomers, the long-term secular trend means boomers are reaching older adulthood in an era when downsizing is less common and comes later in life than it used to.

Note: the CPS ASEC data were downloaded from IPUMS, which requests to be cited as: Miriam King, Steven Ruggles, J. Trent Alexander, Sarah Flood, Katie Genadek, Matthew B. Schroeder, Brandon Trampe, and Rebecca Vick.Integrated Public Use Microdata Series, Current Population Survey: Version 3.0. [Machine-readable database]. Minneapolis: University of Minnesota, 2010.

See the complete article with charts on Trulia.

Jed Kolko is the chief economist of Trulia.

MONEY real estate

Retiring? Stay or Go, You’ve Got Moves to Make

Housing accounts for the biggest part of your costs in retirement. So spend wisely.

Once you start looking at retirement over a horizon of five years or so, it’s time to start thinking about how you’ll manage your biggest single asset: your home.Whether you intend to stay put or move to that lake cottage, keeping real estate costs under control is key to your security.

Those costs may be larger than you think. On average, housing makes up one-third of spending for those ages 54 to 74—the largest single category. More than half of Americans ages 55 to 64 are carrying mortgages, higher than in previous generations. “Paying mortgage debt into retirement reduces your lifetime wealth and limits your spending,” says Pam Villarreal, a senior fellow at the National Center for Policy Analysis.

Staying in your house, with your mortgage paid, doesn’t free you from making decisions. Few pre-­retirees think about adapting their homes for retirement living. “It’s hard for active people in their fifties or sixties to think about what they might want 15 years from now,” says Bonnie Sewell, a financial adviser in Leesburg, Va.  Should you end up not being able to get around easily, though, you’ll have fewer choices and less ability to make them. So take action now:

Moving? Don’t take your mortgage with you. Nearly 30% of boomers plan to relocate when they retire, according to a new AARP survey. Many of them are seeking to cut costs by moving to a lower-tax state. Carry a mortgage, however, and this strategy may not have a big impact on your cash flow, as a recent analysis by Villarreal found. Mortgage debt can easily erode the benefits of lower taxes. Run your own numbers at whynotmove.org.

Cash flow

Sure, if you’ve got plenty of cash, mortgage payments may not seem like an issue. But there’s security, and flexibility, in not carrying debt. “Many of my clients see having no mortgage payments as a way of freeing up cash for future health care costs,” says Philadelphia financial planner Cathy Seeber.

If you plan to stay, renovate now. By your late fifties, your kids are probably out of the house, and the tuition bills are behind you—or nearly so. Time to renovate? Use this opportunity to make a few additional changes that will let you stay in your home for the next couple of decades. “The last thing you want to do in your seventies or eighties is manage a major rehab in an emergency,” says Sewell.

If you have a house with stairs, make sure you can live on one floor if necessary, says Mary Jo Peterson, a design consultant in Brookfield, Conn.  That may mean expanding a powder room to a full bath. You can also add design touches that appeal to people of all ages—a sloped ­entrance-walk instead of steps is more convenient for moms with strollers and college students dragging suitcases, not just the elderly. Find more ideas at aarp.org/­livable-communities, and your family home can last for generations.

 

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser