Warning: Buying The Wrong Home Can Hurt Your Retirement

Buying A Home Can Hurt Your RetirementIt’s a common situation.  Whether you’re at retirement age or not, you look at new places to move to.  You might think buying an awesome home in Clermont FL might be just the perfect investment.  Not only is it a dream home, but it’s also got the added perk that once the kids are gone they’ll want to come back and stay for the Disney parks.  Unfortunately, most Americans don’t realize that buying the wrong home can hurt your retirement. Retirement community costs are rising and it’s being aware and having a plan that could save you.

Buying too much home can limit savings in earlier years. Most American’s don’t seriously start saving for retirement until their 50’s. Buying a large home in your 30’s can limit or eliminate your savings plan all together. Even if you’re not “house poor” from your purchase, the payment limits your ability to save.

It’s recommended that you include “savings” in your budget as soon as possible.  So instead of just seeing what you can buy based on a what a lender says, you should try to stay within the even more confined boundaries in order to increase savings.  If you fail to do this, then you might end up having to choose between your dream of retiring to that Floridian island vs staying put or downsizing.

Another way buying a home can limit your retirement is buy buying a larger home. Buying a larger home requires more maintenance, more maintenance usually means eating into your emergency fund.  Dave Ramsey recommends 3 or more months as an emergency fund. These can get eaten up real quick if your water heater breaks or one of your 3 air condition units goes out on a larger home.   You can multiple this thought if you bought luxury real estate.

Other things to think about is do you want to be debt free or have a mortgage

Should You Be Debt Free In Retirement?

PRO:  You can live off of your income and in theory reduce your needed income. If you pay off your home you can potentially retire earlier.    Essentially, since you don’t have a “housing” bill you could in theory need less.   Of course, we say “in theory” because there’s still maintenance, taxes and insurance to deal with.

CON: The down side of this is that your money (in most cases, 100’s of thousands) is all tied up in the home and you could come to a situation where you need to get the money out.  Unfortunately, since the money isn’t liquid you’re left with selling your home or the aggressive reverse mortgage as your only option if you were not prepared for emergencies properly.  Also, if you’re retired, getting loans on future homes will be tougher as you’ll be on retirement income and not “employed.”

Ultimately, being debt free is a state of mind that many people will find refreshing because their personality is one that seeks stability.   However, for many (I’d say most) it might be better to have the mortgage and save the money.  Money gurus that preach a debt free lifestyle are entertainers and they talk to the masses about this.  They understand that if they tell you debt is OK, you will overspend.  Even with their advice, the vast majority of American overspend and have credit card debt.  If you have the money to pay off the home, bank it, that way should there be a valid reason to pay off the mortgage you could.   While we agree with the financial entertainers, like Dave Ramsey, on consumer credit card debt, we disagree on a mortgage.