Even in the best of times, retirement planning is never an easy or fun task.
Now, this task is being made more difficult because the Trump Administration and top Republicans are considering plans to cut Social Security, Medicare and Medicaid, reducing benefits, adjusting tax brackets and deductions, raising the retirement age, cutting financial regulations and fighting any increases in the minimum wage. Any one of these makes the retirement planning process more difficult, but there is more.
Overall economic growth affects the ability of people to buy houses. When home purchases decline due to a person’s inability to qualify for a mortgage, it means a major engine of wealth creation—home appreciation—is not accessible to many future retirees.
For millions of Americans, homes have a greater value than their 401(k) stock and bond portfolios. Future retirees rely on their home equity to borrow or when it is time to downsize, to sell a larger,
hopefully more expensive house, and move into a less expensive one. That is a time-tested plan and it has worked for many decades.
But the current reality is much different. This is the first generation in American history that is not better off financially than their immediate older generation. A 2014 study by the World Economic Forum found that more than 80% of U.S. households saw no growth in real income during the period 2005 to 2014. This explains why sons and daughters, many burdened with college debt or working in low-paying jobs, are living with their parents and unable to buy homes.
So how will all this news be incorporated into 2017 retirement planning?
My bet is not so much. Retirement planners look at client profiles, risk tolerances, goals, assets/liabilities, available funds, client needs and model portfolios. They have been taught to avoid discussions about politics and religion even though both topics are the focal points of news shows. Most planners avoid discussing Trump’s bad news because it is too sensitive, upsetting or violates company policy.
That is why it is important for anyone planning for retirement to seriously consider this dangerous new environment. The new reality is that everything has changed. Worse, most of the changes will not bode well for future retirees.
Making Smart Decisions About Housing in Retirement
While there are many negative possible events to consider, what we’ll focus on now is the important role of housing in retirement planning. Housing is critical since it is the largest single expense, aside from unanticipated medical expenses, that most people will face in their expected 30 years of retirement. While spending drops for most retirees, the majority of spending goes toward home-related expenses, such as mortgages, taxes, repairs, and insurance.
Here are some facts to consider, based on a paper “Decisions About Housing During Retirement,” by Wendy Weiss and Anna Rappaport:
- Housing expenses generally constitute a major share of total spending during income earning years, as well as retirement. Housing expenses constituted 31% of all expenditures for all consumer units (presumably with retired as well as employed household members) more than half of the housing expenses for homeowners are for mortgage payments.
- There is no accepted rule here, but experts suggest that housing expenses should not exceed 30% of projected retirement income. This means housing costs (mortgage, property taxes, and maintenance for homeowners and rent for tenants) should not exceed 25% to 28% of projected income at the outset of retirement. Renters can expect rents to rise over the decades as they age.
- Boomers hold more diversified asset portfolios than their elders. While their overall net worth is less concentrated in their home and home equity, retirees can decide on the relative advantage of pulling assets from investment accounts or retaining those assets to provide income for their long life expectancy.
- Accessing home equity. A 2007 study found that 24% of the working households expect to sell their home to fund their retirement. Increased longevity may push some aging Boomers to cash in on housing equity at some point over the 30 or so years they are retired.
So where does this leave us?
Given the bad signs in other key financial forces that will affect retirement (likely increases in medical expenses, cuts in pensions and Social Security, etc.), it’s important to make smart decisions regarding housing in retirement. Plan for increases in taxes, home owner’s association (HOA) fees, assessments, and rents that predictably will happen during your retirement.
These are all predictable, but they will be aggravated if the Trump administration makes fundamental changes to the current federal package of retirement programs. All this will only add to the nation’s current, and undiscussed, retirement crisis.