Most discussions of retirement planning these days seem to revolve around issues like safe withdrawal rates, Social Security claiming strategies, and the impact of low interest rates. Let’s not forget a retiree’s choice of housing. It is an important topic financial planners should address with clients. Typically, it should be approached from three interrelated perspectives: financial, emotional, and practical.

Financial
The three most significant financial aspects of housing decisions involve cost of housing, cost of living, and the use of equity. The cost of housing encompasses many expenses, including mortgage payments, insurance, taxes, utilities and maintenance. A retired or retiring client that can reduce their cost of housing relieves some pressure on the portfolio because less cash flow is required to cover the lower expenses.

In my experience, the top target for most clients is the mortgage payment, but mathematically this may not be as important a lever as the client perceives it to be. In the case of a low-interest fixed-rate mortgage, the after-tax cost of borrowing may be much lower than the after-tax expected return from the portfolio.

In addition, because the mortgage and interest payments are fixed, the impact on the budget of eliminating the payment diminishes over time. In contrast, taxes, insurance, utilities and maintenance costs would be expected to increase at least as fast as inflation and possibly faster in the case of maintenance expenses as the home ages. The older the home, the more likely one is  to incur "off budget" upkeep expenses.

Of course, paying off the mortgage is not simply a mathematical decision. In 24 years of advising families, I have yet to come across anyone who has experienced tremendous regret for having paid off their mortgage. The lack of debt can be an empowering emotional boost.

Making a housing change can also mean a move to a location with a lower cost of living. My state, Florida, is a haven for retirees and not just because of the weather. The general cost-of-living is lower than other parts of the country and we have no state income tax. I've seen a number of consumer media pieces touting the benefits of living on the cheap overseas or even here in the U.S. by living in an RV. Those ideas have appeal to some.

The last big financial discussion surrounds the use of home equity. Downsizing can reduce many costs. Smaller, newer homes require less maintenance, insurance, property taxes, utilities, upkeep and remodeling expenses. Downsizing can also reduce or eliminate mortgage debt and free equity for other purposes.

Planners should also consider possible use uses for reverse mortgages. When reverse mortgages first came on the scene, they were almost universally expensive and usually viewed as a last resort. Today's products have improved dramatically, so they should not be dismissed as quickly as in the past.

Emotional
Change is hard and a major housing change may be one of the most difficult transitions to manage. For many, they don't simply have a house, they have a home. It is comfortable to them. They are familiar with their surroundings and their neighbors. It is not easy to leave the home where one raised their children.

These days family is spread all over the country or even the world. A move of any significant distance means a change to the act of visiting or being visited. It is amazing to me how emotionally affected people can be about this.

Practical
When a move is contemplated, several practical considerations need to be made. In fact, sometimes it is the practical elements that are the catalyst to starting the discussion about a move in the first place.

As people age, their needs change. Most people can imagine that if they were to develop say a bum hip, navigating stairs, mowing the lawn, and general upkeep may become problematic. Most also have experience with a family member, neighbor or friend who has been robbed or been the victim of a scam because of cognitive decline. Documents like powers of attorney can help keep funds safer, but moving can also reduce or eliminate many physical and mental impairment safety issues.

Unfortunately, moving can create other issues. The issue of location has other implications beyond local tax rates. How far does the client want to be driving to get to friends, social events, their doctor, hospital, or to other professionals and service providers? If the answer is “not far” moving out into the country or a cabin in the mountains may not be a good choice, even if cheaper. How many more years does a client even expect to be able to drive?

There are always exceptions of course, but generally I found that younger retirees and those approaching retirement are most concerned about access to family members and the practical and financial implications of downsizing. In most cases, the idea of living closer to children and especially grandchildren is quite appealing to retirees. I encourage clients attracted to that idea to discuss it with their children. Some kids love the idea, but others are not as enthusiastic.

There is a difference between grandma and grandpa visiting and grandma and grandpa being neighbors. Also, often because of work-related issues, kids are simply not confident that they will continue to live where they are and would hate to have their parents uproot themselves unnecessarily.

My oldest just started college, so our nest is starting to empty. I am nowhere near ready to retire, yet my wife and I are already discussing whether or not to downsize. Without our kids in the home, we have too much space and property that needs our attention. The practical issues dominate our concerns.

In theory, downsizing can reduce expenses, but that may not be the case. Smaller homes can be expensive, too. I’ve seen more than a few couples buy a smaller place with nicer finishing and features. That resulted in some reduction in utilities and maintenance costs, but no freeing of equity or reduction in taxes and insurance. 

For current retirees, many housing-related considerations have arisen over the last couple of decades worth noting with clients. Regardless of whether a move is in order, they should look for the availability of community support services. Many communities are providing transportation to and from doctor’s offices, offering to deliver meals at home, and arranging social activities. Contacting a local senior center, area agencies on aging, or a client’s house of worship may uncover something useful.

One program that seems to be getting some traction is the so-called “village model.” People join the village for a small annual fee that gives them access to a concierge that can connect them with a range of services, free or paid.

Some new housing developments are built as "co-housing" communities. These are separate homes or apartments situated so that residents can cook for each other, socialize and help each other out. Various collaboratives have developed in around the country where volunteers help neighbors and receive help themselves from neighbors when needed.

Continuing-care retirement communities are an increasingly popular option because few people want to move in with their children as they age. The CRCC’s allow people to stay in the same community, regardless of how their care needs may develop.  This can be quite appealing to couples who wouldn't want a difference in the level of independence between spouses to cause much geographic separation. There are more options now than ever before.
 
The favored topics of safe withdrawal rates and retirement-income strategies are worthy of our attention as are health care costs and funding long-term care. Some people find thinking of physical or mental decline unpleasant, but financial planners do clients a great service by helping them think through or even just develop their awareness of various housing choices. Making good choices can improve their finances and their lives.

Dan Moisand, CFP, has been featured as one of the America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines.  He practices in Melbourne, Fla.  You can reach him at [email protected].