Where you’ll spend the years ahead is as important as how you’ll spend them and with whom you'll spend them. But there are financial and practical implications to consider when deciding where to live during retirement. For any budget and wish list, there are correlating options, including staying put and renovating, downsizing or purchasing a second home.
Many wish to live out retirement in their current home. If your mortgage is fully or mostly paid, this could be an affordable option. But, if you have a large home with extra bedrooms you no longer need and a lawn or pool to maintain, or a sizeable tax burden, it may not be worth the costs to stay put. You’ll want to assess your current living arrangements and costs to decide what is most feasible.
If you decide to stay in your current home, you might want to make some adjustments so it’s more retirement-friendly. For instance, if you have multiple stories in your home, you might want to consider making the first floor fully livable so you don’t have to scale the stairs later in life.
Downsizing and/or renting
Downsizing is another option, especially if kids have recently moved out and you have a lot of extra space. If you’re paying a mortgage, downsizing to a fully paid-for home or renting might alleviate some financial pressures, which may be helpful when you’re living on a fixed retirement income. Many retirees choose to save money by moving to low tax states. New mortgage debt, though, may offset any benefits gained from lower taxes.
If you choose to rent, there are several pros, including easy maintenance, as you most likely won’t have to mow the lawn or repair broken appliances in a rental, as well as more flexibility since it’s often easier to find a rental than a house for purchase. When renting, you can even find different places across the country and rent seasonally.
However, in a rental, your living situation is temporary and can be uprooted if the owner decides to sell or move back in. And you may not be able to remodel or bring pets to a rental. For people that have owned for a while, these changes may be a big adjustment and it may be hard to feel comfortable in the space.
Your financial picture and personal preferences should factor into the decision to downsize or rent, such as whether you planned to leave your house as an inheritance.1 While some view renting as “throwing your money away,” with a rental, you’ll save some money by escaping some home ownership costs such as insurance and taxes.2
Purchasing a second home
Many wish to purchase a second home in retirement. If this is in your plans, you may want to factor the near-term and longer-term implications into your plan (e.g., cash outlay now, interest costs over time, etc.), to make sure you can afford it. You may want to discuss your options and plans with a retirement expert and decide if you can fund the purchase with cash or would rather finance it some other way. Make sure your decision allows for long-term financial well-being and not just short-term benefits.
If it makes financial sense to go for the second home, you may want to consider contributing the maximum amount to your 401(k) before purchasing to potentially have funds to last the length of retirement and cover any costs associated with your new home. While you may plan to rent one or more of your homes for some part of the year, think about keeping enough savings in the bank to cover six to twelve months of upkeep and rental income in case you can’t find a renter.4