3 Ways to Make Sure You're Not Overspending on Your Retirement Home

Some retirees prefer to rent a home so they don't have to deal with maintenance and repairs. But others prefer the stability of owning a home. 

With a rental, your housing costs could rise every year. That won't happen with a fixed-rate mortgage, or a home you buy outright.

But if you're gearing up to buy your retirement home, it's important to make sure you don't go overboard. Here are a few steps you can take to avoid overspending. 

1. Don't allow housing costs to exceed 30% of your retirement income

As a general rule, your monthly housing costs should not exceed 30% of your take-home income. And those costs should include property taxes and homeowners insurance. Even if you're able to purchase your retirement home without a mortgage (such as if you sell a larger home and use your proceeds to buy a smaller home), you still need to make sure these other expenses will keep you at that limit.

Many people find that their income shrinks in retirement compared to their working years. So don't assume a home will be affordable for you just because you're not looking at ongoing mortgage payments. If your monthly income goes from $7,000 to $3,500, it only leaves you with $1,050 a month to spend on housing. If you live in an area with expensive property taxes, you could exceed that limit even if you owe a lender nothing.

If you're buying your retirement home before you retire, try your best to estimate your retirement income. Make a list of expected expenses and try to attach a cost to each to get a ballpark number. 

Don't forget about healthcare expenses, too. Medicare Part B alone costs $174.70 a month this year, and that's just one health-related expense of many you might have to bear.

2. Take a close look at property taxes -- and find out how often they tend to rise

Most home buyers know to look carefully at property taxes before committing to a home purchase. But don't just look at the current property tax bill for a home you're interested in -- also look at the property tax history. That should give you a sense of how often property taxes rise in that area. 

In some areas, homeowners of a certain age are eligible for a property tax freeze. But that's something you'll need to research, too, and it may hinge on your income. 

Either way, you probably don't want to take on a property tax bill that might rise exponentially from year to year. So it could be best to steer clear of towns where homes are assessed and re-taxed annually. 

3. Think carefully about the maintenance involved

The benefit of being retired is having more time to tackle home maintenance yourself, as opposed to having to pay to outsource it. On the other hand, if you're older, you may not have the physical capacity to perform certain maintenance tasks without risking injury. 

Think carefully about the work involved in maintaining the home you want to buy. You may love the idea of getting to live on an acre of land. But that's a lot of grass to mow, and it's potentially a lot of snow to clear during the winter. You'll want to make sure you can afford the maintenance that comes with living in your retirement home if you're forced to hire help.

Overspending on a retirement home could leave you short on funds for other essential expenses, like healthcare. You don't want to risk landing in debt at a time when you're not working. Run the numbers carefully before committing to a place to spend your senior years.