Your Highest Retirement Expenses may be Housing!
Housing Expense Summary
Housing expenses include:
- Mortgage Payments,
- Real Estate (Property) Taxes,
- Insurance (liability, fire, wind, flood, theft, etc.),
- Cable TV & Internet,
- Utilities (gas, electric, water, trash, security, & phone),
- Maintenance & Repair, and
- Furniture.
Additionally, if you live in a condominium association or homeowners' (HOA) association, you will need to pay Association Dues and any Special Assessments. Dues are paid either monthly or quarterly, and Special Assessments are levied against home/unit owners for the association's unplanned extra expenses for the maintenance and repair of common or limited common elements.
Property Insurance
Property Insurance can vary significantly from several hundred dollars a year to several thousand or more based on where you live and the value of your home. Major factors influencing your insurance cost include:
- Home value
- Home age and construction
- Contents (furniture, jewelry, etc.)
- Location (state and local)
- Coastal and/or Flood zone area
- Other hazard factors (e.g. high winds, sink holes, mud slides, fire zone, etc.)
With the many catastrophic weather-related events that our nation has experienced in recent years, you can expect insurance costs to consume an increasing amount of your retirement income. Consequently, you'll want to thoroughly investigate any local hazards that can influence your insurance cost. Particularly, if you're interested in coastal living, check the location of your planned new home on FEMA's flood zone maps. You'll want to stay out of Zone A unless you're willing to pay the price.
Condominium Insurance (H06 Policy)
An H06 Policy is an insurance policy crafted specially for condominium unit owners that bridges the gap between the insurance provided by the Association and each unit owner’s insurance needs. It covers all personal property within the unit or limited common elements excluded from the Association's policies. H06 Policies encompass the following five major areas: Dwelling Coverage, Personal Property, Loss of Use, Personal Liability and Medical Payments.
1. Dwelling Coverage (Coverage A) generally insures the interior walls, drywall, wallpaper, paneling, flooring, carpeting, and built-in cabinets. This covers the part of the building (your unit) that you own. The interior of your unit is your responsibility, and it is important to make sure your real estate investment is protected.
2. Personal Property (Coverage C) typically protects your personal belongings against the same list of risks and perils mentioned in Dwelling Coverage. Personal property includes everything you own in your home: Furniture, TVs, appliances, jewelry, computers, rugs, clothing, books, cookware, etc.
3. Loss of Use (Coverage D) - If a loss occurs and your condo is damaged, it may take some time to renovate your condo. During this time, you will probably need somewhere else to live while the work is being done. Loss of Use coverage will insure you for temporary housing expenses such as an apartment rental.
4. Personal Liability (Coverage E) - One of the most important parts of a condo insurance policy is the Personal Liability Coverage. This will cover you against lawsuits, legal expenses, and medical costs if you are legally responsible for injury or property damage to others.
5. Medical Payments (Coverage F) - If a person is injured in your condo, and they are not named on your policy, this coverage would pay for some minor medical treatment, such as exams or X-rays.
Mortgage Payments
Although most people agree that it's highly desirable to pay off your mortgage prior to retirement, more and more retirees are faced with significant housing debt. The temptation to use the equity in their homes for home improvement projects, vacations, and new cars has caused many to lose sight of the need to eliminate debt burden. Also, with today's attractive mortgage rates (under 5%) some question whether it's advisable to pay down their mortgage or maintain/build their investment portfolio in hopes of earning returns of over 6 percent.
The obvious answer is to try to enter retirement as debt-free as possible. This will give you the needed financial flexibility to better live your dreams.
Property Maintenance
Besides all of the expenses described above, maintenance, particularly in an older home, may be significant. For retirees living in a condominium or homeowner association (HOA), expenses may be mitigated by maintenance costs included in monthly association fees. For condominium unit owners, association fees include maintenance of the buildings and grounds, leaving the homeowner's responsibility limited to mostly the inside of the unit. HOA residents, depending upon the association's covenants, may retain responsibilities for their building's roof, exterior walls, windows/doors and the grounds surrounding their home.
Besides what's covered within the community, the homeowner is always responsible for appliances, most utilities and maintenance of the unit's interior. These costs grow as the unit ages.
Condo Docs & HOA Covenants
It is important to understand the costs and benefits of association living. When Condominiums or HOAs are purchased, the new owner receives, from the seller, a set of Documents which govern the Association:
- Declaration - The master deed that defines the portions of the development owned by the individual owners and those owned by the Association. It creates the framework for operating/managing the Association and defines the rights and restrictions of each owner in the Association.
- Articles of Incorporation - Bring the Association (i.e., the corporation) into existence and describe its structure.
- Plat Plan - Defines what's included in the Association units (if a Condo Association), land and common areas/structures.
- By-Laws - Define how the Association operates.
- Rules and Regulations - Regulate day-to-day use of the homes/units and common areas.
All purchasers of homes within an HOA or condo Association should familiarize themselves with the content of these documents. They define the homeowner's property rights, obligations and restrictions as well as the services provided by the Association. Also, the purchaser should request a copy of the Association's "Frequently Asked Questions" or similar document that describes the fee structure and other important considerations.
Property Taxes
A property tax is a municipal tax levied by counties, cities, or special tax districts on most types of real estate - including homes, businesses, and parcels of land. The amount of property tax owed depends on the appraised fair market value of the property, as determined by the property tax assessor. Property taxes are generally a major factor in retirement and can be higher than Income Taxes for many retirees.
Because the calculations used to determine property taxes vary widely from county to county, the best way to compare property taxes on a large scale is by using aggregate data. The following chart, based on data from Tax-Rates.org, allows you to compare property taxes across states and counties by:
- Median property tax as percentage of home value, and
- Median property tax in dollars (based on appraised home value).
This chart does not reflect the wide disparity in property taxes across the state's counties, school districts, and local municipalities.
Property Taxes by State
| Highest to Lowest | State | % of Value | $300,000 | $400,000 | $500,000 | $600,000 |
|---|---|---|---|---|---|---|
| 1 | New Jersey | 1.89% | $5,670.00 | $7,560.00 | $9,450.00 | $11,340.00 |
| 2 | New Hampshire | 1.86% | $5,580.00 | $7,440.00 | $9,300.00 | $11,160.00 |
| 3 | Texas | 1.81% | $5,430.00 | $7,240.00 | $9,050.00 | $10,860.00 |
| 4 | Nebraska | 1.76% | $5,280.00 | $7,040.00 | $8,800.00 | $10,560.00 |
| 5 | Wisconsin | 1.76% | $5,280.00 | $7,040.00 | $8,800.00 | $10,560.00 |
| 6 | Illinois | 1.73% | $5,190.00 | $6,920.00 | $8,650.00 | $10,380.00 |
| 7 | Connecticut | 1.63% | $4,890.00 | $6,520.00 | $8,150.00 | $9,780.00 |
| 8 | Michigan | 1.62% | $4,860.00 | $6,480.00 | $8,100.00 | $9,720.00 |
| 9 | Vermont | 1.59% | $4,770.00 | $6,360.00 | $7,950.00 | $9,540.00 |
| 10 | North Dakota | 1.42% | $4,260.00 | $5,680.00 | $7,100.00 | $8,520.00 |
| 11 | Ohio | 1.36% | $4,080.00 | $5,440.00 | $6,800.00 | $8,160.00 |
| 12 | Rhode Island | 1.35% | $4,050.00 | $5,400.00 | $6,750.00 | $8,100.00 |
| 13 | Pennsylvania | 1.35% | $4,050.00 | $5,400.00 | $6,750.00 | $8,100.00 |
| 14 | Iowa | 1.29% | $3,870.00 | $5,160.00 | $6,450.00 | $7,740.00 |
| 15 | Kansas | 1.29% | $3,870.00 | $5,160.00 | $6,450.00 | $7,740.00 |
| 16 | South Dakota | 1.28% | $3,840.00 | $5,120.00 | $6,400.00 | $7,680.00 |
| 17 | New York | 1.23% | $3,690.00 | $4,920.00 | $6,150.00 | $7,380.00 |
| 18 | Maine | 1.09% | $3,270.00 | $4,360.00 | $5,450.00 | $6,540.00 |
| 19 | Minnesota | 1.05% | $3,150.00 | $4,200.00 | $5,250.00 | $6,300.00 |
| 20 | Massachusetts | 1.04% | $3,120.00 | $4,160.00 | $5,200.00 | $6,240.00 |
| 21 | Alaska | 1.04% | $3,120.00 | $4,160.00 | $5,200.00 | $6,240.00 |
| 22 | Florida | 0.97% | $2,910.00 | $3,880.00 | $4,850.00 | $5,820.00 |
| 23 | Washington | 0.92% | $2,760.00 | $3,680.00 | $4,600.00 | $5,520.00 |
| 24 | Missouri | 0.91% | $2,730.00 | $3,640.00 | $4,550.00 | $5,460.00 |
| 25 | Maryland | 0.87% | $2,610.00 | $3,480.00 | $4,350.00 | $5,220.00 |
| 26 | Oregon | 0.87% | $2,610.00 | $3,480.00 | $4,350.00 | $5,220.00 |
| 27 | Indiana | 0.85% | $2,550.00 | $3,400.00 | $4,250.00 | $5,100.00 |
| 28 | Nevada | 0.84% | $2,520.00 | $3,360.00 | $4,200.00 | $5,040.00 |
| 29 | Georgia | 0.83% | $2,490.00 | $3,320.00 | $4,150.00 | $4,980.00 |
| 30 | Montana | 0.83% | $2,490.00 | $3,320.00 | $4,150.00 | $4,980.00 |
| 31 | North Carolina | 0.78% | $2,340.00 | $3,120.00 | $3,900.00 | $4,680.00 |
| 32 | California | 0.74% | $2,220.00 | $2,960.00 | $3,700.00 | $4,440.00 |
| 33 | Oklahoma | 0.74% | $2,220.00 | $2,960.00 | $3,700.00 | $4,440.00 |
| 34 | Virginia | 0.74% | $2,220.00 | $2,960.00 | $3,700.00 | $4,440.00 |
| 35 | Arizona | 0.72% | $2,160.00 | $2,880.00 | $3,600.00 | $4,320.00 |
| 36 | Kentucky | 0.72% | $2,160.00 | $2,880.00 | $3,600.00 | $4,320.00 |
| 37 | Idaho | 0.69% | $2,070.00 | $2,760.00 | $3,450.00 | $4,140.00 |
| 38 | Tennessee | 0.68% | $2,040.00 | $2,720.00 | $3,400.00 | $4,080.00 |
| 39 | Colorado | 0.60% | $1,800.00 | $2,400.00 | $3,000.00 | $3,600.00 |
| 40 | Utah | 0.60% | $1,800.00 | $2,400.00 | $3,000.00 | $3,600.00 |
| 41 | Wyoming | 0.58% | $1,740.00 | $2,320.00 | $2,900.00 | $3,480.00 |
| 42 | New Mexico | 0.55% | $1,650.00 | $2,200.00 | $2,750.00 | $3,300.00 |
| 43 | Mississippi | 0.52% | $1,560.00 | $2,080.00 | $2,600.00 | $3,120.00 |
| 44 | Arkansas | 0.52% | $1,560.00 | $2,080.00 | $2,600.00 | $3,120.00 |
| 45 | South Carolina | 0.50% | $1,500.00 | $2,000.00 | $2,500.00 | $3,000.00 |
| 46 | West Virginia | 0.49% | $1,470.00 | $1,960.00 | $2,450.00 | $2,940.00 |
| 47 | District of Columbia | 0.46% | $1,380.00 | $1,840.00 | $2,300.00 | $2,760.00 |
| 48 | Delaware | 0.43% | $1,290.00 | $1,720.00 | $2,150.00 | $2,580.00 |
| 49 | Alabama | 0.33% | $990.00 | $1,320.00 | $1,650.00 | $1,980.00 |
| 50 | Hawaii | 0.26% | $780.00 | $1,040.00 | $1,300.00 | $1,560.00 |
| 51 | Louisiana | 0.18% | $540.00 | $720.00 | $900.00 | $1,080.00 |
Property Tax Exemptions
One factor to consider when estimating property taxes is residency (or homestead) exemptions. Many states offer exemptions (discounts) on property taxes based on residency, age, income and/or other factors. Residency is an absolute requirement to receive basic exemptions, but other factors can further reduce or eliminate your property tax obligation. Some of these exemptions are difficult to calculate -- e.g., New York State's School Tax Relief Program (STAR). Other states provide multiple discounts where a series of factors can add up to yield substantial savings. For example, Florida provides over $75,000 of exemptions for low-income long-resident seniors and can totally exempt disabled veterans or surviving spouses of veterans from paying property taxes.
Utilities
As shown above, utility expenses include gas, electricity, water, trash collection, security, and phone. If you live in a condominium association or homeowners' (HOA) association, some of these expenses may be included in your monthly or quarterly maintenance fees. (See "Association Fees" in the adjacent column). A frugal retiree monitors and evaluates these utility expenses and takes measures to contain or reduce them, considering:
- Energy Star appliances,
- Tankless or hybrid water heaters,
- Programmable thermostats,
- Eliminating land lines with cell or VOIP phones,
- Replacing cable TV with streaming services,
- Self-monitoring security camera and intrusion systems,
- Using gas appliances instead of electric, and
- Using well water for irrigation.
Multiple recurring (monthly or quarterly) expenses can quickly consume monthly income and reduce discretionary funds.
Sunshine State Taxes
Then, there's the situation in Florida, the state that's often thought of as a tax haven due to its: lack of a state Income Tax, reasonable Sales Tax (6.0%) and elimination (in 2007) of its Intangible Tax. However, Florida has an inequitable property tax system. This is due to the "Save Our Homes" cap on Florida property taxes which went into effect in 1995. The cap limits the increase in the annual assessment of homestead properties in Florida to 3% or the Consumer Price Index, whichever is less. This cap plus the rapid ramp-up of real estate prices from 2000 through 2006 and again more recently, have resulted in a multi-billion-dollar tax shift from these properties to everyone else -- businesses, rental property, part-time residents, etc. During these years second home owners saw their property taxes rise 150% while Florida residents experienced a 3% (or less) rise each year.
This means that if you move to Florida and purchase a home, you will be paying significantly higher property taxes than your neighbors that have been longtime Florida residents. Where there are two identical houses, one could be assessed over twice as much property tax as the other. This tax burden shift makes Florida property taxes excessively high for new residents and low for longtime residents, who have depended on Florida government services for many year.
In addition, Florida legislators' passed Amendment 1 in 2008 which makes a homeowner's total savings from the Save Our Homes cap portable. With this amendment the total savings produced by the cap on the homesteaded property are transferable to another homesteaded property anywhere in Florida. Consequently, two Florida residents purchasing a similar home will each pay different property taxes on their new home based upon how long they've been Florida residents.
Association Fees
As stated in the Location/Environment page of the Lifestyle section of this website, a retiree is usually no longer tethered to their pre-retirement home and has many choices as to where to live. A common choice is to purchase a home in a community where property maintenance is provided. These communities are governed by an Association, managed by a Board of Directors, with an onsite Community Association Manager (AKA Property Manager) responsible for the day-to-day Association affairs. Associations generally receive payments for their services through property owners' monthly or quarterly Maintenance Assessments (Fees).
One of the most overlooked costs in deciding where to live is Association Fees. These Fees can run from $300 to $800 or more a month, depending upon amenities and whether you live in a Condominium Association or Homeowners Association (HOA). Most people make housing decisions based on the price of the home, its location and amenities and don't realize their full cost of ownership until after the sale.
To understand association maintenance fees and what they cover, you first need to understand the distinction between condominium associations and HOAs. In a condo association, the homeowner owns their individual unit and an undivided share of the common elements, whereas in an HOA, the association owns the common elements. In a condo association the association is responsible for maintenance and repair of the both the buildings and the common areas. The unit owner's only responsibility is the floor and wall coverings and the contents (furniture, appliances, etc.) of their unit. For this reason, comparing fees is not an apples-to-apples comparison.
Condo association fees generally pay the cable TV, water, sewage, trash collection, master insurance, landscaping, pest control, security, fire protection, and property management/maintenance bills. A portion of the fees are set aside and invested as reserve funds for financial protection against the cost of major common replacement items -- concrete restoration, general restoration (pools, lakes, sidewalks, bridges, etc.), elevators, building painting, roof replacement, parking lot paving, generators and irrigation systems. Maintenance fees also pay the salaries of association employees -- office, maintenance and security staff.
HOA fees include many of the same items as condo associations; however, they do not cover costs to maintain the owner's building nor insurance (wind, property and flood) on the building. Condo owners only need to carry insurance on the content of their unit, whereas homeowners in an HOA need to insure their home and contents. Home maintenance and insurance can be costly in an HOA. All of these factors need to be considered in calculating the total cost of ownership. What seems like an affordable house may soon become unaffordable once the homeowner starts receiving monthly or quarterly fee assessments.