Millions of Americans will not be able to afford to retire. Millions more will barely be able to retire. And still millions more won’t be able to afford to retire, but they’ll go ahead and do it anyway. That’s why you may need to sell your house to retire.
This is a suggestion that I made in What to Do if You Cannot Afford to Retire. It must be reemphasized as a standalone strategy. For millions of Americans, their house is their single biggest asset. For that reason, it may need to be sold.
I realize that this suggestion goes against the cultural norm. People are taught to buy a house, and then keep it at all costs. I completely disagree with that mindset. There’s a time to own a house, and a time to sell it and move on.
If retirement income and assets will be limited, selling your house may be absolutely necessary.
Your House May Be Your Biggest Source of Retirement Capital
The Internet is overflowing with articles and videos preaching the gospel of saving for retirement. It’s absolutely the right strategy. However, not everyone is in a position to save for retirement. Many people who are can only save the bare minimum.
There’s no debating this point – it’s a fact. According to a study by the Government Accountability Office (GAO), 52% of all Americans have no retirement savings. It’s not a stretch to say that many who do have retirement savings have no more than a few thousand dollars.
Here’s an even scarier statistic…A 2016 study by Go Banking Rates showed that 69% of Americans have less than $1,000 in savings. Within that group, 34% have no savings at all.
Only 31% of Americans have at least $1,000 in savings. That includes people who have anywhere from $1,001 and up. Even if it’s $5,000 (or $10,000) it’s still not much given today’s price levels.
If you’re in this group – which is the decided majority – and you own a house, it may be your single biggest source of potential retirement capital. If you’re serious about retiring, you may have to sell your house do it.
It may even be impossible to retire without doing it.
It Makes No Sense to Be House Poor
One of the most tiring phrases I’ve ever heard is I have to stay in my home. Really? Even if you can barely afford it? Even if you really can’t afford it?
That’s not the brain talking – it’s the emotions. And emotions should play no role in dollars and cents decisions. Emotions will usually cause you to make the wrong choice.
I’ve seen dozens of people living at, below, or just above the poverty line, while having six figures in equity in their house. It’s usually the elderly. They’re hung up on that I have to stay in my home thing.
Why? Because I have to. Oh, no further questions then.
If you’re old enough to remember the TV show The Beverly Hillbillies (start watching this video at the 20:00 mark), then you might remember the first episode where Granny – and her rocking chair – are loaded onto the back of the truck so the family can move to Beverly Hills. It was the only way to make her go.
So it is with many of the elderly today.
If you’re truly able to retire comfortably while retaining your home, then it makes sense to keep it. But if you’re on the edge of poverty, it makes no sense whatsoever.
There’s usually no practical need to struggle in retirement when you have substantial equity in your house. It’s a self-imposed prison.
You Can’t Afford to Be Over-housed in Retirement
This is one of the primary reasons why you may need to sell your house to retire. If you’re a single person, or a couple, and you’re living in a house with three or four bedrooms, you’re paying for space that you don’t need.
That includes higher property taxes, higher utilities, and even more repair and maintenance expenses. Generally speaking, the bigger the house is, the more it will cost to keep.
It’s even worse if you have a large piece of property. Sure, you may be able to mow the lawn, trim the hedges, rake the leaves, clean the gutters and shovel snow when you’re in your 60s and in good health. But will that still be possible when you’re in your 70s or 80s?
The problem with waiting until you can no longer take care of the property is that you get set in your ways. This is another trend that I’ve seen many times, we all have. You stay in the house until everyone you know is fully aware that you don’t need to be there – except you.
Real World Examples of People Who Stayed in their Houses Too Long
A friend of mine, speaking of his own elderly mother, said that most people stay in their homes 10 years longer than they should. I think that’s right. He didn’t make that up either. He was told that by a senior care counselor. His mom was in her 90s, was declining, and needed to be moved into a facility. She resisted for years, at her own peril.
I’ve seen it play out with my own mother. After my father died, she insisted on staying in the house all by herself. Her cost to keep the house was rising every year. She had to pay contractors to take care of everything. Her property taxes and insurance were going up every year. But she insisted on staying.
My sisters and I practically had to engineer a bloody coup to get her out of that house. That’s one of those times when you realize how the parent/child relationship changes 180° when the parent gets old.
Ironically, within a few months of finally leaving, she admitted that she stayed too long.
Insisting on staying in the house was her emotions speaking, not her mind. Only once she was out of the house could she see the absurdity of continuing to live there all by herself. Like many of the elderly, she was completely over-housed. She was paying for that condition with no practical benefit. She was even endangering herself by living alone.
Just because a house made abundant sense when you were raising your family, doesn’t mean it’s a necessity when you move into the retirement years. You should have fewer housing needs, enabling you to live more lightly and inexpensively.
You absolutely should take advantage of that benefit.
The Tax Deduction May Be All Gone
One of the most compelling reasons cited for homeownership is the tax deductibility of mortgage interest and property taxes. But if your mortgage is paid off you no longer have an interest deduction.
Under the tax code, you’re entitled to take the standard deduction of $6,350 if you’re single, and $12,700 if you’re married filing jointly. If your mortgage is paid, and your real estate tax is lower than these thresholds, you’re not getting any tax benefit from owning your house.
Even if your mortgage interest and real estate taxes are slightly above the standard deduction, you may not be getting the benefit you think. If your marginal tax bracket is only 10% or 15%, it’s not any kind of a windfall.
For example, let’s say that your mortgage interest in real estate taxes come to $15,000 per year. You’re married filing jointly and you’re in the 15% marginal tax bracket.
Now in real estate agent-speak you’re getting a tax break of $2,250 ($15,000 X 15%). But that’s entirely wrong.
You’re actually getting a deduction only on $2,300. That’s because you would be able to take $12,700 on the standard deduction anyway. The only portion of your mortgage interest and property taxes that are actually deductible are the amount that exceeds that deduction ($15,000 – $12,700 = $2,300).
If you’re in the 15% tax bracket, that translates to an income tax savings of just $345 per year.
What that means is that you really don’t have a significant tax benefit from owning your house.
This is a common situation with people who are retired. That’s because when you’re living on a reduced income you generally have fewer deductible expenses. For most people who are retired, the tax benefit of owning a house is either minimal or completely nonexistent.
Mobility May be More Important than Stability
This is a non-financial factor that could prove to be strategically important. Once you retire, you’ll no longer be tied to a specific geographic location. Absent a job, or at least a career type position, there may be no economic reason to stay where you currently live.
On the flipside, you may have one or more major reasons to make a move. Here are just some of the potential motivations:
- You might want to move to a less expensive location.
- There may be another location that’s more conducive to the kind of work that you want to do after you retire from your current occupation.
- Your children and grandchildren live in another state, and you want to move to be closer to them.
- You want to move to a place with a better climate or better recreational amenities.
- You’re not sure you’ll be able to keep your home on a reduced retirement income.
- You’re over the extra work and responsibility that comes with homeownership, and you just want to move to an apartment or condo.
- You simply want to be free to move to wherever you please.
Homeownership is often an attempt to gain permanence. But the reality is that nothing in life is permanent, including life itself. Homeownership may prove to be an anchor that’s no longer worth keeping.
You may have needed a stable home to raise your children in. But do you also need that for yourself?
Why You May Need to Sell Your House to Retire – Crunching the Numbers
Let’s get into the most practical reason to sell your house to retire. Let’s say that you have $50,000 saved for retirement. It could be $10,000, or it could be $100,000 – whatever the amount is, it’s clearly not sufficient to enable you to completely retire.
Now let’s also say that you have a house that’s worth $300,000, and you own it free and clear.
It may be comforting to know that your house is paid for, and you can live there mortgage-free in your retirement years. But if you have little in the way of retirement savings, it may be better to sell the house and cash out.
If you sell the house and walk away with $300,000, you can invest the money and even begin taking withdrawals against it. Using the safe withdrawal rate of 4% you can withdraw $12,000 per year ($300,000 X 4%). That’s $1,000 per month.
In theory at least, if you have a well-balanced retirement portfolio, you can withdraw 4% per year for the rest of your life, and never outlive your money. You can even bump that number up higher if you are older, like 70.
You won’t be able to retire on $1,000 per month, but if you will also be collecting $3,000 per month in Social Security (we’ll assume you’re married and both eligible), your income is now up to $4,000 per month. That’s a much more credible number.
And if it isn’t, you can always work to supplement that income. Earning an extra $1,000 or $2,000 per month would likely give you a comfortable semi-retirement.
This isn’t a perfect strategy of course, but perfection is not the goal. It’s about successfully working within the constraints of limited options.
Now I know the first argument against this strategy will be that it will cost you at least $1,000 per month to live in a different location. But that’s not entirely true, for the following reasons:
- Contrary to popular belief, you can almost always find a less expensive place to live – especially if you are retired.
- Many people who retire specifically move to lower cost areas for that reason.
- Since you will no longer be 100% job dependent, you can live in a place that has fewer jobs and a lower cost of living.
Even if you continue to live in your paid-off home, you still won’t be able to live “rent free”. That’s a myth. You’ll still have to pay property taxes, homeowners insurance, utilities and repairs and maintenance. Should you decide to move into a rental situation, you’ll only have to pay rent and reduced utilities. The repairs and maintenance will be completely gone.
The bigger benefit is that you will have transitioned from a very modest amount of retirement savings – maybe $50,000 – to a much more substantial $350,000. Even that may not be enough for you to fully retire. But it will definitely open up a lot more options.
In today’s America, retirement is no longer certain. If you hope to retire on limited resources, you absolutely need to think differently. In many cases, this will require making radical changes. That may include selling your house to retire. If that’s the case, then you it needs to be considered. It’s not a bad thing – it’s just different.
Have you thought about selling your house to retire?