How Prepared are You to Finance Your Retirement 'Dream' Home?

05/02/2016 03:47 pm ET Updated May 03, 2017

Three important questions to answer as you build your plan

It's not often that many people walk into their jobs one day and just decide they are going to retire. My grandparents and parents, who were born in the 1890s though 1920s, grew up with the notion that after you found the right company to work for, you would put in many loyal years of service. Then, after building up decades of tenure; corporate pensions and Social Security would support you through your retirement. To these past generations, the idea of significant retirement planning during your working years was a foreign concept. However, the days of retirement being "taken care of" are long gone. Americans now shoulder a much greater responsibility and need to think holistically about their future. People are living longer, pensions are going away, the cost of living is climbing, and Social Security can no longer be looked at as a "safety net" for retirement. The focus lies heavily on preparing and organizing your finances today to be ready for tomorrow.

So, where do you begin? As an advisor, I like to "get real" with my clients' finances -- starting with their cost of living. As we reach our fifties and beyond, we begin to think more seriously about our individual needs, wants and wishes in retirement. I always tell my clients, "It's great to dream, but a good dream with a plan can actually become reality." Understanding your future cost of living is what I would consider the centerpiece of helping to define your retirement plan.

To help recognize what would be included in those expenses, there are a few essential items that need to be part of your analysis -- and housing is most often at the top of this list. As you can imagine, it's hard to retire without a roof over your head! That said, as you start to think about and prepare for your housing accommodations in retirement, here are a few questions to consider as you build your plan:

Will you carry a mortgage in retirement?
Are you planning to stay in the home where you are currently living? If so, do you anticipate paying it off, or can you afford a mortgage in your retirement? According to a new survey from Voya Financial, more than one-quarter (26 percent) of current retirees had an outstanding mortgage balance and a significant percent of this group (16 percent) had a balance of $50,000 or more. A mortgage is an important factor to keep in mind to lay out your plan as any remaining obligations will impact your retirement savings approach and the amount you will eventually have to spend in retirement.

If you are nearing the end of your working days and you still have an outstanding mortgage balance, consider what refinancing might do for you. Online tools such as a mortgage calculator can help you identify how much you could possibly save by refinancing your mortgage to help decide if this is right for you.

It's also essential to understand any future mortgage obligations as they will likely influence your decision to sell an existing home and relocate, or to downsize to a more cost-effective lifestyle. If you downsize, what would the equity in your current house buy in the area where you would want to retire?

Do you plan to relocate?
Another topic to consider is geography. Are you located in the area you ultimately want to be in during your retirement? If not, do you plan to move to a more ideal location -- one that offers you your preferred lifestyle and affordability on a retirement budget? The cost of living in certain parts of the country and around certain major cities can vary dramatically and should be factored in to the decision. There are many other considerations as well -- from proximity to family and friends and quality healthcare to a desirable climate and accessible amenities. Voya's survey also found exactly half (50 percent) of Americans plan to relocate when they retire, while nearly the same amount (49 percent) intend to remain where they currently live. Of those who plan to move, more than one-third (34 percent) preferred the coast as their ideal retirement location.

Before swapping your snow boots for flip-flops, it would be wise to look at the big picture of a new location. I strongly suggest that my clients spend some time renting or vacationing in a possible retirement destination so they can test it out before making a commitment. While visiting, I encourage them to do the things they might do in retirement, such as visiting a local gym or church to see if the area is somewhere they would even want to be.

Make sure to do your research before making the plunge based on a geographic location alone. Housing costs (for owning or renting), taxes and health care access are all important factors in making the decision of where you will live. Try utilizing tools like Voya's myOrangeMoney calculator, which allow you to see how the costs of health care might change based on your desired retirement state.

Have you considered health care costs?
Speaking of health care, this is another major item to address, including pre-Medicare or supplemental programs that might be needed to boost potential gaps in Medicare coverage. Voya's survey found that more than four-in-ten (41 percent of) people admitted that the costs associated with health care were their biggest worry in retirement. Working with a financial professional can help you look at the current costs of health care for retirees and factor in expected inflation. In doing so, be sure you are in agreement when it comes to the inflation figures as you must feel comfortable with the projections being used.

You should also determine how to protect your "needs," as well as how your partner or dependent family member might be financially impacted if something were to happen to you or if you required long-term care? A few important questions to ask as you're laying out your holistic retirement plans might include:
  • Do you need life insurance protection?
  • Do you have a term policy that will run out before your mortgage is paid off?
  • If you're married or have a domestic partner, how will they make up for the loss of Social Security income?

These are all key questions to answer to build and adjust your plan. Just remember: The plan comes first! Try not to purchase any products until you know how they will work within your broader strategy. This is a mistake I see many clients face.

Meeting with a financial professional that specializes in retirement planning can help you better understand and talk through these considerations. They can also assist with building out a holistic plan, working with you along the way to help you secure your goals. And, once your plan is designed, it is important to meet at least annually to make sure you're on track and to adjust it to meet any life changes. Retirement planning is not a "set and done" process. With the right preparation and guidance, you can become ready to live out the dream -- and in the home -- you've worked so hard to achieve.