Retirement brings new financial challenges, especially when Social Security makes up all or most of your income. To ensure a good quality of life later, it is essential to cut back now.
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What's the best place to start? Housing. By eliminating or reducing mortgage payments and other costs of home ownership, retirees can finance a better lifestyle as they age.
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Housing costs are the largest expense item for retirees. According to Rand.org, they represent roughly 25% of spending for Americans 65 and older. For the 40% of older homeowners who still have a mortgage, that percentage is usually much higher, according to a report from the Joint Center for Housing Studies at Harvard University.
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According to the 2021 American Community Survey, older mortgage holders had an average monthly housing cost of $1,470 in 2021, compared to homeowners without a mortgage, who paid an average of $520, and renters, whose average monthly housing costs were $940.
Therefore, it makes sense for retirees and soon-to-be retirees to downsize their homes, or even consider moving to cheaper regions. By minimizing or eliminating mortgage payments, people on fixed incomes can save for expenses that are likely to increase as they age, namely healthcare costs. Fidelity estimates that annual average health care spending nearly doubles for those between the ages of 55 and 75 and that a retired couple over age 65 will spend $300,000 on health care during their retirement.
Owning a cheaper home not only reduces mortgage costs, but also means you have to spend less on maintenance. Home repairs are the most common unexpected expense for retirees, according to the Society of Actuaries, although this financial surprise can be mitigated by less home maintenance.
Downsizing to a cheaper home can also translate into more retirement savings. According to Vanguard research, people aged 60 to 69 have the greatest potential to unlock home equity by moving, which can be used to inject more money into a retirement nest egg – a useful source of cash for people with a limited income.
