A few weeks ago, Sam at Financial Samurai wrote a great post called Housing Expense Guideline for Financial Independence. I’m always amazed at the data Sam shares (and what he has kept track of for years) because we became financially independent (FI) without keeping track of anything. It worked for us because we’ve always lived well within our means and we had good financial habits. But there is a lot to be said for knowing and tracking your numbers! We might have been FI years earlier if we had…
Sam put in a survey at the end of the post and asked readers, “What percentage of your gross income do you spend on housing?” He suggested that to “start making massive financial progress” he had to get his housing costs under 10% of his gross monthly income – even though the general rule is to stay below 30%.
I’ve never calculated our housing costs as a % of our income. So I thought it might be a good thing to do. 82% of Sam’s readers were between 6% and the recommended maximum – 30% of gross income (before taxes/deductions). I guessed that we were around 30% but I really had no idea!
A few articles I read suggested including the mortgage, property taxes, insurance, and HOA fees to determine monthly housing costs. That made sense to me but I also understand there are many more costs associated with home ownership.
Current home – $1380 of expenses*/month divided by 2016 gross monthly income of $8500/month = 16.2% (*Expenses include mortgage, taxes, insurance – no HOA)
Not too bad! Especially since we don’t need to work toward FI anymore. But we also own a vacation condo that we don’t (can’t) rent out… so we need to add that in too.
Vacation condo – $500 of expenses*/month divided by 2016 gross monthly income of $8500/month = 5.8% (*Expenses include HOA, taxes, insurance – no mortgage)
2016 – Total monthly housing costs (for 2 houses) as a percent of gross income = 21.8%
According to Sam’s guideline to achieving FI feedback chart, we’re doing great (especially since the total is for two houses!)
Another interesting point to consider is that the HOA at the condo covers other expenses that would need to be added on at our current home. Our $340 HOA fee covers water, sewer, garbage, exterminator costs, exterior maintenance, heated pool, small club/exercise room, grill, large patio/table & chairs, and cable TV (that we can watch online too!) None of these are accounted for in the calculations above for our current home. (That’s a picture from our lanai – a beautiful view for what we pay!)
So even though we are doing fine, I know my job is coming to an end in less than 60 days. I started thinking about the percent of gross income spent on housing in retirement. I found a few articles from 2014 that cite a report published by the Employee Benefit Research Institute (EBRI). The findings showed that retirees are warned much more about rising health care costs in retirement than housing costs.
And that is really worrisome because even though the report includes utilities and home maintenance as part of the housing costs, EBRI suggests that housing costs total between $1,000 and $1,500/month for most older adults. And some older adults don’t have much more income than that each month!
Our plan for the next 4 or 5 years involves having two homes (we’re snowbirding in winter) at a cost of about $2000/month ($1880/month in our calculations above.) And we feel very lucky to even be considering this! We worked very hard through the years, but we also understand how privileged we are.
But how low could our retirement housing costs go?
I started thinking about that when I read the articles citing the EBRI report. I’m pretty competitive too – so I dug in a little deeper 😉
I’m going to project out about 5 years (2022) to determine how low our costs could go. With both kids out of college and finding new places in the country (or world) to call “home” by 2022 – we could sell the house and keep the vacation condo as our primary home.
And as I showed in a chart in Determining How to Fund the Gap in Early Retirement – our income won’t be much different in 2022 than it was in 2016. This is because I will start collecting my pension that year. (So we’ll leave the denominator in any calculations of gross income as $8500/month in the projections.)
It would seem that my calculation above for the condo would work fine here since our projected income for 2022 will be very similar to our actual income in 2016. Our housing costs would be 5.8% of our gross monthly income. But it gets even better!
If we made our condo our primary home, we would also get a homestead property tax exemption! This would cut our (already very low) taxes almost in half – saving us around $350/year. This would bring our housing costs down to 5.5% of our gross monthly income.
But then I got thinking that my original calculations for our home expenses didn’t include ANY of the expenses that our HOA covers. It only included the mortgage, taxes, and insurance. Why would I include everything the HOA covers in one calculation (condo) but not the other (home)?
It makes sense to me to take away the HOA expense to see what our monthly housing cost as a percent of gross income would be for our condo in 2022. (From what I read on Sam’s post, he didn’t include utilities and I’m not sure about taxes/insurance.)
Vacation condo – $150 of expenses*/month divided by 2016 gross monthly income of $8500/month = 1.8% (*Expenses include taxes w/homestead exemption, insurance – no mortgage or HOA)
Maybe I’m missing something (and there is a good chance I am!) But that is AWESOME news to us if we’re right. (We know our HOA fees can go up and that we can have special assessments. Mr. MSD is on the condo board and we have strong condo board financials too. But that is similar to having a major maintenance need on your house too – right?)
So just how low can our retirement housing costs go as a % of our gross monthly income?
Under 2% low!
We’re not sure that we will ever live in the vacation condo as our primary home, but you can certainly see why it might be a really smart decision! It is paid off, it has very low taxes, the HOA covers almost everything (except electric and the inside structures), and for now – our insurance premiums are very low.
We chose real estate that met our needs – not exceed them and it paid off big. Satisficing over optimizing all the way.
Things may change dramatically over the next five years, but knowing that we can have insanely low housing costs in an amazing setting just a couple miles from the #1 beach in the country? We’ll definitely keep it as an option!