The Thinker

Affording retirement and running the numbers

I’m a bit anal about money. It probably comes from being a child of someone who lived through the Great Depression. So our retiring last year was a leap of faith. Of course being anal about money, I spent some time with our financial adviser basically to hear him tell me we could actually afford to retire. I retired, but didn’t quite believe it could last, particularly when we started spending thousands of dollars fixing up our house to sell it. The money going out far exceeded our retirement income.

April 29 is our settlement date, but will be important for another reason. On that day for the first time since at least 1981 I will be debt free. That’s because with settlement I won’t own a house anymore and thus won’t have to sweat the mortgage payment. Never mind I never technically owned it. I never got the mortgage balance to zero, although the balance is now under $20,000. With settlement the loan balance will be paid off. We expect a check for about $440,000, which will probably sit in a high yield checking account for a few months. Then it will go to purchase the next house.

We have no car loans and our home equity loan will be paid off at settlement. So we’ll be living totally debt free, assuming we don’t take out a mortgage on the next house. That’s our goal although we will probably draw from other savings to pay cash for our house to avoid a mortgage. Over the years we refinanced our current house twice, so our mortgage payment has lately been under $1200, and that includes escrow for property taxes. $1200 a month is very cheap housing in Northern Virginia, particularly since the next owner of our house is paying $505,000. Even with 20% down he will likely have a monthly mortgage payment in excess of $2500. Mortgage payments will hopefully soon becoming a distant memory for us.

No mortgage payment frees up a lot of cash, which is a good thing for many reasons. One reason is because when you are retired, you live on less money than you used to. To enjoy the same standard of living, you pretty much have to pay off your mortgage. Until recently I wasn’t confident that we could actually do it, and it has made me nervous. Now it’s becoming clear that we can actually retire without sacrificing our standard of living. More money will still go out for a while. Simply moving our stuff will cost us close to $5000. There will be settlement fees with the new house, perhaps a couple of thousand dollars. And there will be one time costs with moving into a new house, which mostly involves window treatments. Toward autumn though these should be in our past as well. With time I hope we can recoup these major one-time expenses.

I do know that when we move to Massachusetts we’ll be spending far less to live. Moving to “Taxachusetts” is supposed to be just the opposite, so much so that Massachusetts is frequently cited as one of the most expensive states to live. In our particular case, most of our income is my pension. Massachusetts won’t tax this income. Running the numbers today I quantified the savings: about $380 a month. These savings essentially continue until we are dead. Assuming we live 30 more years and never move out of Massachusetts, that’s $136,800 we can spend on something else.

With a new house under construction, we’ll be renting for three to four months. We’ll be paying $975 a month to rent a two bedroom, one bath apartment in Easthampton. Rent is not the same thing as a mortgage and since we are renting month to month we have no legal commitment beyond the end of the month. The landlord takes our rent and pays for the apartment’s upkeep as well as its property taxes. As a percentage of our monthly income, $975 will be hardly anything and much less than we pay to live in our current house, when you add in the other expenses like lawn care and water.

Of course it’s not quite that simple. We will eventually move into our house paid for with cash, but houses have expenses too. Our property taxes will be more, $15.80 per thousand dollars of assessed valuation, last time I checked Northampton’s property tax rate. We’ll pay more in property taxes in Massachusetts than we do in Virginia, about $1300 a year more. Property taxes alone should cost us around $620 a month, which is as much as a mortgage payment in many places. Since we’ll be in a condominium, we’ll pay about $350 a month to the condo association, compared to $62 a month we pay now to our homeowners’ association. However, the condo fee includes exterior maintenance, so I won’t have to worry about having the money to replace the siding or the roof. Electricity and water are likely to be more expensive as well, although many houses install solar panels and often get credits from the power company for putting electricity into the grid.

So there’s no way yet to fully quantify our net savings by relocating, retiring and selling our house, but it is likely to be substantial. I don’t expect that we’ll have more money to spend as retirees than when I was working and making more money. That will become clear in time. With a relatively fixed income it will become important to track expenses against a budget and regularly adjust our lifestyles accordingly. Not all costs can be anticipated. But it looks like on April 30 we will not only be debt free but retired both in body and spirit.


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