We live in a world where people think it’s a smart idea to put bombs in their underwear. That’s why I’m particularly grateful to have the benefit of someone with real wisdom in my life. The eighty-something lady who lives next door to my father’s house always has something quiet and wise to say and I try to be smart enough to listen up. So, the other day she made me listen when she said, “Many widows are house rich and cash poor. Not a good way to be.”
It got me thinking about real wealth, and the difference between being rich and having a high income. Not at all the same thing. Plenty of financial advisors have met with clients with six figure incomes and no money in the bank. People who live in multi million dollar houses who would face foreclosure if they had a stroke. People who own a house free and clear, but have no other income but social security. Not a good way to be.
So, let’s think about housing and retirement. How much house can you really afford, not now, but when you actually retire? First big mistake is building on or upsizing when your kids are in high school. Sure you’re tired of tripping over hockey sticks and skateboards, clearing ten tubes of lip gloss off a bathroom sink and no house is big enough to accommodate your kid’s shoe size. But guess what? God willing they’re going to be filthifying a dorm room in a few years instead of your “great room”. So don’t saddle yourself with three extra empty bedrooms that need to be weather stripped and vacuumed, or a Great Room so big you need a GPS to find your cat. You could have a month in Milan instead. Once you box all that junk up and send it to Goodwill or their first tatty apartment, you’re going to have a lot of echo space and money invested that you’ll wish was sitting in spendable mutual funds instead.
But maybe you’ve been smart and haven’t overbuilt you house to the extent that your neighbors drive by when they need a good laugh. Maybe you’ve even retired that mortgage before you turn 90. That still doesn’t mean you can or should afford the house. Take what the house is worth. Let’s say $500,000 for a nice round number. That’s not what you paid for it, but say it’s what you could actually get if you sacrificed it in today’s market. Invested, that amount of cash would give you at least $20,000 per year in conservative income withdrawal. You do need to live somewhere, but could you find an acceptable place to rent or buy with a total monthly cost less than $1,667/month? Or look at it another way. Is $20,000 equal to or less than 28% of your retirement income? That’s the percentage of income that used to be considered prudent to allocate to housing. For that (I’ll do the numbers) you need an income of around $71,000, or approximately $1,275,000 in invested assets including the house (assuming a Social Security payment in addition of around $2K a month). Take off the house, whether cost or loss of potential income, and that amount gives you a safe withdrawal rate (4%) of about $51,000 a year in income + $24,000 of Social Security. Do your own numbers. If they look okay, great. Otherwise, your house is too expensive. The same numbers apply if you’re still making the payment when you retire—28% of your income, or it’s probably too expensive.
You don’t have to go very far to find people in their fifties living in million dollar houses with $50,000 in their retirement accounts. Too expensive. Dump the manse and get a plan. Move when you can still afford it and are healthy enough to do it. Don’t wait until your kids have to hold a distress sale to pay for your long-term care. Freedom is really all about the ability to make choices for yourself, not wait until others make those choices, in crisis, for you.
