Financial Factors to Contemplate When Scaling Down for Retirement
In the second part of our series exploring factors to consider when downsizing in retirement, we delve into the intricacies of understanding the full cost of a retirement home. Beyond the listing price, several key factors must be taken into account to ensure a financially sustainable and lifestyle-aligned living arrangement.
One of the essential aspects to consider is the ongoing monthly costs and fees. These include utilities, property taxes, homeowners insurance, maintenance, and any homeowners association (HOA) fees or community service charges, which can vary widely by location and housing type.
The size and floor plan of the home also play a significant role. Larger units, more bedrooms, or premium features like balconies increase costs not only upfront but also for maintenance and utilities. Choosing a smaller, more efficient floor plan may help reduce overall expenses while preserving access to amenities, particularly in community settings.
Another crucial factor is the impact of inflation and future cost increases. This is particularly relevant for senior living or retirement communities, where ongoing inflationary pressures, such as rising labor costs, may result in increasing rents or fees over time.
Healthcare and care-related costs also need to be factored in, as they can vary significantly based on the level of care required. From independent living to skilled nursing, the intensity of care needed may change over time, impacting the total expense of living arrangements.
Taxes and capital gains considerations are equally important when downsizing or relocating. Property taxes and potential estate or inheritance taxes should be factored into your cost calculations, and the sale of a previous home may incur capital gains tax liabilities.
Location factors, such as cost of living, state income tax, property tax rates, and general affordability, can influence the cost-benefit analysis of the home’s location. Climate, proximity to family, and availability of social relationships may also impact the decision-making process.
Lastly, long-term financial predictability and flexibility should be assessed. Your retirement budget should be able to accommodate unexpected expenses or inflation, and certain contracts or purchase agreements may offer stability in costs or future care guarantees.
Most states exempt several sources of retirement income, including retirement accounts like IRAs, 401(k)s, 403(b)s, TSPs, and pensions, from state income tax. However, localities in some states may have additional taxes, such as county supplements, that should be considered when evaluating new home states, counties, and townships.
Some states have high property tax rates to offset low income tax rates, like Florida and Texas. Assessed values can be lower than market values in many areas, which can impact property tax payments. Websites like Zillow and Redfin allow you to see past tax assessments.
Delaware is often referred to as a "tax-free state" because it does not have sales taxes, but it does have property taxes and income taxes. The focus on sales tax may be overrated, as only about 50% of monthly spending is subject to income taxes.
The true cost of housing involves more than just the listing price and can be hard to decipher for transplants. The author recommends taking a month-long trip to the metro areas being considered for downsizing, using VRBO or Airbnb for long-term rentals.
Carefully comparing state income tax rates is advised when considering downsizing, with tax-friendly states including Washington, Nevada, Florida, Tennessee, and Texas (which has no income tax). Estate/inheritance taxes can vary widely among states, with some states having no such taxes and others having both.
To get a full picture of the impact of relocating, including factors like tax rates and maintenance costs, financial planning software is recommended. The free version of the author's recommended financial planning software can be accessed by entering "primary home relocation" as a goal.
In the process of evaluating potential retirement homes, it's important to consider not only the initial listing price but also the ongoing monthly costs and fees, which can encompass utilities, property taxes, homeowners insurance, maintenance, HOA fees, and community service charges.
Besides, the size and floor plan of the home can significantly impact costs, as larger units, more bedrooms, or premium features may increase expenses for maintenance and utilities, while smaller, more efficient floor plans may help reduce overall expenses.
