How Housing Choices Affect Your Retirement Plan

As I’ve been working in earnest on retirement planning over the past several decades, I’ve realized that retirement planning isn’t a math problem to solve. Nearly all of the major decisions we make about whether, when, and how to retire have both financial and nonfinancial dimensions, and it’s important to explore both aspects.

Where we decide to live in retirement is one of the best examples of a decision that brings together financial and nonfinancial considerations. So it’s always been a bit of a headscratcher to me that we don’t discuss housing choices more in the context of retirement planning.

In this excerpt from my book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement, I chat with author and Morningstar contributor Mark Miller, who has written about many dimensions of retirement, including housing, over his distinguished career. We discussed how older adults should approach housing decisions as they mull retirement. The full book chapter also includes a discussion of reverse mortgages and continuing care retirement communities, among other topics, but I’ve edited it for brevity.

Christine Benz: You’ve written a lot about the topic of housing in retirement, and you’ve noted that when retirees approach the decision about where to live, they’re often quite short-sighted. They’re very focused on the here and now and what they like about their current living situation so don’t look to the future. Can you address that?

Mark Miller: This is a general problem that people have with retirement planning. It’s just human nature: It’s difficult to think specifically about your future self and what your needs might be.

That’s one of the reasons people procrastinate on any number of things, whether it’s retirement saving or making a retirement plan. In terms of housing, what’s really hard is that aging can involve any number of disruptive life events. You’re at an increased risk for chronic health problems as well as physical limitations that can make it harder to live independently in your own home. It can be difficult to contemplate that your health might decline, or that you might find yourself widowed, or in a tenuous financial situation. That’s the challenge: imagining yourself at an older age, when you might be less healthy or mobile.

Christine: It seems like there are a few key aspects of housing choices in retirement. One is the home itself, the physical space, and whether that is going to work for you as you age. What should people be thinking about there?

Mark: Very few homes in the United States have single-floor living, no-step entry, and doors that are wide enough for wheelchair access. I’m not saying that everybody needs to have those things, but it’s still important to assess and think about them.

Affordability is also important. If you have made a retirement plan and you have a careful estimate of what your monthly income is going to be and what you think you’re going to be able to generate during retirement, ask yourself if your current home is going to be affordable as you age, or is it going to be a burden? Try to get a good sense of your current cost of living. On the housing side, consider not only your mortgage, tax, and insurance, but whether expensive repairs or remodeling might be needed. Are those repairs going to become more frequent and expensive? Do you have to add a bedroom on the first floor? Do you need a lift for the staircase?

Another point would be whether you are making efficient use of your space. If you’re living in a house with a lot more square feet than you need, that could be a good reason to consider a move. Will the home be physically stressful or emotionally draining going forward because it’s too big, too old, or already in disrepair?

Christine: What do you think of the idea of a phased housing plan, where maybe my first ten years are in the home that I currently live in, which may be among a lot of friends and neighbors I’ve known for a long time, and then I plan to transition to a smaller, more aging-friendly home later on?

Mark: That can work, but that move can be difficult if you’re dealing with a house that is full of a lot of stuff that you’ve accumulated over many decades. There’s a good argument for getting that work done while you’re still physically and mentally healthy, unless you know your kids are going to come in and do it for you.

Location and Community

Christine: What about location? What should people be thinking through when evaluating the location where they live?

Mark: It’s important to understand that most people don’t move when they retire. That’s a media myth. And when people do move, they generally don’t move very far away. But if you’re considering a move, ask yourself these questions: Is your location close enough to healthcare that you want to access—hospitals, physicians, and so on? Is the current location still a good fit considering your needs for transportation, walkability, and the like? Would another location be better for proximity to family and friends or are you already well situated for that? These are all important factors, but they tend to get drowned out in the overwhelming amount of clickbait information online about retiring to tax-friendly or sunny locations. That may be right for some people, but people need to really think it through.

Christine: People often say that they want to age in place, to be in a familiar setting near family and friends. How can they assess whether staying put is practical?

Mark: All of these surveys that you see repeatedly show that an overwhelming majority of people hope to age in place. Primarily, I think it means that people don’t want to wind up in an institutional setting like a nursing home. That’s an understandable instinct. But the Centers for Disease Control definition of aging in place is the ability to live in one’s home and community safely, independently, and comfortably, regardless of age, income, and ability level.

In other words, it doesn’t necessarily mean staying in your house. You might sell your house and move into an apartment in the community you live in, or you might move further out but still have access to family, friends, and community resources. You can have it both ways. It’s not just, “Stay in your house and have access to family and friends,” or not. There’s a middle ground.

Relocation

Christine: You referenced relocation earlier. How can people do their due diligence when they’re thinking about relocating? Here I mean making a big move versus staying in their community.

Mark: You need to find trustworthy resources to help you sort through and evaluate locations and get beyond the clickbait about tax-friendly locations. While taxes are a consideration, of course, making that a primary factor is a “tail wagging the dog” approach.

Moving to a sunny location with lower taxes can be a great thing, but you have to weigh that against other factors. AARP (formerly the American Association of Retired Persons) has a website called the Livability Index that grades every neighborhood and city in the U.S. on a zero to 100 scale as a place to live when you’re getting older.

You can plug in specific addresses to see how a location scores for attributes like housing, neighborhood, transportation, health, civic engagement, and so on.

Another site that I like a lot that doesn’t get nearly enough attention is called Best Places. It’s a data aggregation site that will suggest locations to you that match your interests and preferences based on answers you give to questions on housing, affordability, culture, cost of living, and so on.

AARP also has something called The Network of Age-Friendly States and Communities. It’s mostly aimed at government professionals, but it does have a lot of information about livable communities.

There’s also the Village to Village Network. And no, I’m not talking here about “The Villages,” the famous Florida retirement community—far from it. Villages are community-based grassroots organizations where people pay membership fees on an annual basis. Very often they’ll hire a staffer or two to coordinate services that people need as they age. The very first one was formed in Beacon Hill in Boston. Residents in the neighborhood were aging and looking for ways to stay in their homes—and they recognized that they were going to need support. Village networks provide resources such as vetted lists of trustworthy contractors, home health aides, as well as social, networking, educational, and cultural opportunities. Think of it as a community of people aging in a neighborhood, but not all in one physical location.

Another resource to know about are NORCs—short for naturally occurring retirement communities. These are communities of older people that form naturally, typically in apartment buildings or towns with high concentrations of older people. NORC residents can access medical services from visiting nurses and doctors, social services, wellness and social activities, often with the support of a social service agency. They can be based on housing or a neighborhood. NORC members do pay very small membership fees, but the main source of funds is grants or government funds. The heaviest concentration of these communities is in New York City.

Finally, there’s a book I like a lot, called Aging in The Right Place, which is written by a gerontologist named Stephen Golant. It examines the relationship between location and successful aging.

Christine: You mentioned that taxes should be secondary to some of these other considerations, like relationships and proximity to doctors and so forth. But how can older adults get their arms around the financial dimensions of where to live and whether to relocate, including taxes?

Mark: States are all over the map with respect to taxes in retirement. There’s an organization called the Institute on Taxation and Economic Policy that does a survey of state policies on taxation of retirement income. What they found is that there are several states that have no personal income tax, period, and many more that exempt Social Security income, or offer partial exemptions. Some states tax Social Security using the federal formula, while others have their own formulas for taxation of Social Security. Many states exempt some or all pension income, while others have various kinds of personal exemptions and deductions. Most have their own special exemptions on property taxes. It really is all over the map, so if taxes are something that you really are focused on and care about, check it out because there’s just no rhyme or reason to how states are doing this.

Christine: It seems like the broader point is to be holistic about it. I shouldn’t just focus narrowly on my property tax bill, for example, even though that’s one that you tend to feel really viscerally because you write those checks.

Mark: In retirement, the taxation of pension income and Social Security is really important, as is the general income tax situation in a given state if you’re drawing money out of a tax-deferred account.

Excerpted with permission of the publisher Harriman House Ltd. from How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement by Christine Benz. Copyright (c) MMXXIV Morningstar, Inc.