The No. 1 Overlooked Expense That Derails Retirement Budgets Isn't Healthcare
For many retirees, healthcare is the expense that gets the most attention, as these costs are already enormous and continue rising as retirees require more medical care. But there's another major cost that often flies under the radar until it starts putting real pressure on a fixed income.
Finance experts explain the other expense that can derail retirement if you're not careful.
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The No. 1 Overlooked Retirement Expense
Many retirees assume their housing costs will shrink once the mortgage is gone, but that assumption can be dangerously misleading.
"In reality, housing doesn't go away in retirement. It just changes form," according to Julian B. Morris, a CFP and principal of Concierge Wealth Management.
That "form" includes ongoing expenses beyond mortgages, such as property taxes, insurance, maintenance and utilities, said Brian Finkelstein, chairman of Broad Financial.
Why Housing Costs Keep Rising in Retirement
Even without a mortgage, the costs tied to owning a home tend to increase over time, especially in certain regions. Finkelstein said that property taxes and insurance are generally considered two of the fastest rising costs, especially in growing areas.
"None of these costs are shocking on an individual basis, but together they combine to create a steady upward climb," Morris said.
Retirees may not have thought much of this when it was all tied together with a mortgage and they were working, but a $12,000 annual property tax that rises to $16,000 is a lot of money on a limited income. Additionally, he said, "Even without a mortgage, it's very common to see $15,000 to $25,000 per year in costs just to carry the home."
The Hidden Costs That Catch Retirees off Guard
Additionally, maintenance and repairs can create financial strain. Morris said that retirees should budget for around 1% to 2% of the home's value annually in repairs, but even that can vary, if homeowners need to make a big-ticket repair, like a roof replacement versus an HVAC system repair.
Retirees should budget for these costs through "predictable income," according to Tom Buckingham, chief growth officer at Nassau Financial Group.
"If essential housing expenses rely heavily on withdrawals that fluctuate, affordability can erode over time," he said.
The Surprise Cost of Selling Your Home
Even retirees who plan to downsize or cash out their home equity can also face unexpected financial consequences, particularly from taxes, according to George Dimov, CPA, founder and CEO of Dimov Tax.
"Nobody warns them about the huge tax bill they get when they finally try to sell their house," he said.
Dimov shared an example of a client who bought her home in 1986 for $140,000. She then listed it for sale at $1.1 million many years later.
"After she got the exclusion, she still had to pay federal taxes on almost $700,000. Her house was not the retirement asset she thought it was."
The good news is that if you sell your home, you do not have to pay taxes on a certain amount of profit, he said. The problem is that these numbers have not changed since 1997 and have not been adjusted for inflation.
How To Tell if Your Home Is Still Affordable in Retirement
The key to avoiding housing-related financial stress is to look at housing affordability "through the lens of income, not home value," Buckingham said.
Make sure to have enough guaranteed income — from Social Security, retirement savings and annuities — to cover core housing costs.
At the very least, aim for a practical benchmark, where housing costs no more than 20% to 30% of total retirement income, Morris said.
"Anything above that is going to build pressure and cause stress."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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