There's bad news for Americans who are retired or near retirement: The percentage of households over age 55 that carry housing debt is rising steadily, and as of 2013, it was roughly 50%, according to a recently released study from the Center for Retirement Research (CRR) at Boston College.
That's part of the reason researchers also think 52% of all households are at risk of living less comfortably in retirement than they did while in the workforce. That figure would be closer to 44% if many pre-retirement households weren't still carrying big mortgages that ballooned during the housing bubble, when people took out home equity loans based on the increased equity in their homes, which vanished when the bubble burst in 2008.
The frightening reality is that more people than ever before are approaching retirement age with serious housing debt that inhibits their ability to save for retirement and pay off other debts. But there are some simple steps you can take to lower your housing expenses and boost your retirement savings.
Figure out whether you should rent or own
Because the housing bust occurred nearly a decade ago, let's presume that if you're still in your house, you've managed to afford it, even if you have a sizable mortgage payment resulting from a home equity loan.
But maybe you've been scrimping to get along and neglecting your retirement savings in order to stay in the house. Or maybe you've been holding off on paying down some of that housing debt in favor of putting more in your 401(k). But if this track will leave you with a high mortgage payment when the time comes to retire and live on less income, you should consider a different living situation.
If you're over 50 and have grown children out of the house, then think about downsizing to a smaller, more affordable home. And depending on where you live, renting could be a cheaper option as well.
The drawback to renting is that you can probably count on seeing your rent increase every year, and the number of older, less expensive units cannot accommodate the rising number of renters. According to a 2015 Harvard study, the average rent in for a new multi-family housing unit was $1,381 in 2015. You also won't be accruing any equity. However, you won't have to pay the cost of fixing water heaters, replacing broken windows, and other expenses that unexpectedly crop up.
You'll have to consider how much you can afford to pay in rent compared with how much it costs on a monthly basis to own your home. The national average monthly mortgage payment ranged from $461 to $1,037, according to the Bureau of Labor Statistics, so the more affordable option depends highly on your personal circumstances.
You'll also have to take into consideration whether your house is "underwater," which means the mortgage is greater than the value of the house. If that's the case, then selling right now would limit your options to a short sale or a foreclosure, neither of which will do your credit rating any good.
Increase your income
There is never a downside to making more money, especially when it gives you an opportunity to pay down debt and save more for retirement. Get a part-time job that will increase your income and the amount of your Social Security benefits down the line. Another option is to consider taking in a roommate. You'll have to check on the tax implications and see whether any of your expenses are deductible (see IRS publication 527), but it's an easy way to make a profit. The only caveat is that you have to make sure you're renting to someone who's reliable and responsible. Unlike renting an apartment to someone, renting a room places a stranger in your living space. Get references. Make rules. Do background checks. Local and state police will often do background checks for a nominal fee. The best renter is someone who can prove he or she has a steady income and is looking for a short-term, relatively low-cost place to live while socking away cash to make it on his or her own. By "short-term," think six to 12 months.
To figure out how to much to charge, check online classifieds in your area. A good rule of thumb is to charge enough that you are making a profit but not so much that the potential renter could easily find many cheaper options. Don't be afraid to turn people down if they seem unsavory or not a good fit. With the average rent in a new multi-unit building at $1,381, whatever you offer will likely seem a bargain. Also don't forget to be clear about food, sundries, and responsibility for chores. Paying to feed someone else will cut into your profit. You can expect that your electricity, water, and heat will go up, but what you're charging will offset those expenses, some of which you may be able to write off.
Get rid of debt first
If you've been carrying high mortgage debt, then you may be tempted to use those first part-time paychecks or rent checks to splurge on everything you've been missing out on. Don't do it. The whole point of increasing your income is to cut your debt to a manageable level so you can live comfortably after retirement. Think of it as forgoing something you want today so you can eventually have what you want most.
Start by paying off your credit card debt as quickly as possible. If you only make the minimum payment each month, then you could wind up paying more than double that amount thanks to the interest you'll accumulate. So the bigger your payments, the more money you'll save in the end. And once you've paid off that debt, you can take the money and apply it to reducing your home equity loan, which will cut down on your housing debt.
At the same time, increase your savings for retirement. Once you've paid down your credit cards, you can do some type of split where a portion of the money goes to your retirement savings and another portion goes toward your home equity loan. The whole point is to wind up in a position where your mortgage is manageable and you're creating equity with every payment. That will put you in a better position if you decide you want to downsize five to 10 years from now because the value of your home will exceed the cost of paying off your mortgage.
Your housing situation will have a huge effect on your financial well-being and your quality of life in retirement. No matter your current situation, explore every option and see if you could be just as happy (or even happier) in a new, more affordable home.
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