Tag Archives: Pretirement

Great cities — a forgotten key to your pretirement

Lovely Vancouver, BC -- photo from a recent trip. If you're looking for great cities, you can't do much better than Vancouver.

Lovely Vancouver, BC — photo from a recent trip. If you’re looking for great cities, you can’t do much better than Vancouver.

As infants we begin with barely a dim awareness of our surroundings. Eventually that blurry upward view of crib rails and ceiling lights turns into faces and walls. Shapes, colors, figures. Next an awareness that this is MY room. Then MY house.

We get older and learn to recognize our own street. We become familiar with our own schools and eventually our own neighborhoods and cities.

Some of us move away from these first towns and make our own homes elsewhere. A very small subset of the population identify specific criteria for the place they want to live and seek out that perfect place. Most of us, however, stay near where we grew up or move for employment.

Here’s the thing, though: For those in already pretired or driving toward pretirement, the city where you choose to settle matters. A lot. And, yet, it’s one of the most ignored keys to finding your freedom.

I think we tend to ignore this because it feels intractable. Maybe we don’t want to move away from family. We already own a home here. All our friends are here. I could ridicule each of those as excuses, but they’re actually all really great reasons to stay put.

But as I’ve said many times, pretirement calls for sacrifices. Even if you made a high salary, saved a massive percentage of it, and theoretically could pretire comfortably, it’s all for naught if you are set on living somewhere extremely expensive, such as Manhattan. It’s not just the expense of your home. Cities themselves have widely varying costs.

And it goes beyond cost as well. What’s the point of living inexpensively if you have to dodge bullets every day? Or have to breathe polluted air and drink polluted water?

What makes great cities great?

It’s impossible to make a comprehensive list of what makes a city great. But I’ll share a few things that top my list of things I find in most great cities. Feel free to add your own in the comments. It’s a topic I’m very passionate about, so the more ideas we can collect, the better.

Safety

I guess this one is obvious since it’s so fundamental to a place not sucking. But it’s not a binary element. You’re not “safe” or “not safe”. You’re more or less safe. And that can vary quite a bit even by neighborhood. Unfortunately there is some correlation (somewhat overblown, however) between the cost of an area and how safe it is. Because you’ll want to be living a low-overhead lifestyle AND be as safe as possible, it’s something of a balance. The way I look at it is there should be a reasonable level of safety and once that’s met, I’ll just move on to other factors. Besides you probably have about the same odds of being flattened by a latte-slurping soccer mom in her SUV as you are to get mugged in most cities.

Affordability

I won’t dwell on this because it’s somewhat obvious, but the cost of living and especially the cost of real estate is a key determining factor. This can be tough, though, because there’s a conundrum at work here: When a place is nice, rich people want to live there and thus drive up prices. If an area is a craphole, the people who can move away do so and you get self-selecting conditions for blight. Cities struggle with this all the time when they try to keep housing affordable. They allow cheaper construction and the area turns into a ghetto and they end up paying a fortune for police service and basic public safety. They make an area nicer and wealthier people move in and drive out the original residents. But if you’re pretired, you may be able to live farther from job centers and thus be able to keep your housing costs low while still enjoying a great area.

Walkability

This one is so often overlooked but it’s so important in allowing you to drop your car expenses. If you and your spouse no longer need to commute, you might be able to drop down to one or even zero cars. Plus you’ll enjoy your lifestyle more than ever as you don’t have to get in the car to go anywhere. Another thing to think about is your transition into traditional retirement, or to be blunt, think about when you’re old. Driving is difficult and scary for seniors. Build yourself a lifestyle now that takes that strain off your future self.

Transit

I’m a huge public transportation fan. Unfortunately I live in one of the worst cities for getting around without a car. Here in Seattle, they’ve had many opportunities to build robust transit systems and they’ve been voted down repeatedly by short-sighted voters. It’s surprising given how liberal we are here. It’s only been in recent years — decades after nearly every other major city has deployed at least a light rail system — that we’ve taken the plunge. Our bus system is OK, but depending on where you live and where you need to go, it could double your travel time. It was disheartening returning to Seattle from a trip to Tokyo a few years ago. Their system is mind-meltingly awesome and to step off the plane in Seattle to our rinky-dink system was just pathetic.

Bicycle friendliness

A Barcelona bike path. Note the grade separation from walking path to bike path to roadway. Picture taken from upper deck of tour bus. Also note the entrance to the underground subway.

A Barcelona bike path. Note the grade separation from walking path to bike path to roadway. Picture taken from upper deck of tour bus. Also note the entrance to the underground subway.

Bicycling is by far the most efficient way to travel short distances but so many cities and towns make this so difficult. Seattle has been improving its bicycle infrastructure in recent years, but I’ll be honest: it’s still ridiculously bad to the point where I do not feel it’s safe. A bicyclist dies here every couple months and our city leaders are still thrashing around and throwing tons of money at the car culture still. On top of the safety issue, we are renowned for our many steep hills. I’ve actually never seen a bike going up the hill I live on, although we see bikes going down quite often. The best way to end up in a bicycle friendly town currently is to move out of the U.S. or to a smaller town. Hopefully in a few years that changes drastically.

Take a look at my picture of the bicycle lanes from my recent trip to Barcelona. Cars, separated from buses, separated from grade-separated bike lanes, separated from a lovely walking path. Brilliant and simple. (And they have a wonderful underground subway system.) Contrast that to here where you’re lucky if you find a crosswalk that still has some paint on the road.

Cleanliness

We all like a clean city, but this goes beyond where there is litter blowing down the sidewalk (important as that is). Cleanliness extends to things like the air you breathe or the water you drink. It’s important to think about the long-term risks to your air and water. Are they fracking near your home? Are there coal-burning plants nearby? How clean is the water in your area? This is important not only for enjoying the many, many years of awesome life you have in front of you, but also for ensuring your health. What’s the point of living an amazing life of pretirement if you end up hobbled with chronic illness?

There’s another important point to finding an unpolluted city: Your home value. Those homes that had their wells poisoned by fracking are now valueless. Those people who thought they were being so clever by leasing some land to natural gas companies have wound up trapped in a house they can’t sell, suffering from devastating illness. It may not be as dramatic, though. Just in general, a rundown, dirty or polluted neighborhood can mean lower equity growth and a harder-to-sell property.

Weather

I used to always say that if I ever moved again, I wanted an upgrade from Seattle’s dreary weather. That’s actually becoming less important to me in recent years, although I still often long to live somewhere with more sun. As a native Washingtonian with webbed feet, however, I’m finding it harder to deal with the heat than the cold. Although I still hate being cold. Probably I’d adjust after a few months somewhere warmer and that’d probably be good for my overall health. The important point, though, is that I’m not moving somewhere where the weather sucks just because it’s cheaper. Nasty muggy summers and frigid snowy winters? No thanks! I do like the weather in many parts of California, for example. In Northern California, the weather is quite temperate and when I lived there I rarely remember being either too hot or too cold. That could be why it’s so overpopulated, though.

Infrastructure

What do I mean by infrastructure? I’m not necessarily referring to the classic governmental meaning or roads and bridges. Rather, I’m talking about the various functions that support your lifestyle. For example, transportation, medical facilities (you may not want to be too far from a hospital for instance), grocery stores or anything else you might need. This is probably the main reason I’ll likely stay within or near a reasonably large city instead of moving to a rural location. I once considered moving out to the country but I imagined rushing to a hospital an hour away in case of an accident, and the move just didn’t seem too wise. Add to that the need to drive nearly everywhere and country living just wasn’t as inexpensive as it first appeared. So I’m focused now mostly on medium- to small-sized cities.

Open space

Humans have a very real need to be outside. Beyond fresh air and exercise, there is something in us that needs the natural world to keep us functional. I think it’s safe to say that someone who is outside in nature every single day is highly unlikely to suffer from depression. Open spaces act as the lungs for cities clearing the air and softening the landscape. We have some great in-city areas here in Seattle, where you almost forget you’re in a city. And we can be deep in the mountains within a 30 minute drive. From an open space perspective, Seattle is hard to beat.

Culture

If your local town looks like a Long John Silver’s raped a Wendy’s it may be time to re-evaluate your life choices. Car-oriented, strip mall development is extremely hard on the psyche and is a very expensive way to live, especially if you’re still commuting to work. This cheap development also leads to a cultural desert, where there’s nothing to do and nowhere to go. Contrast that with a similarly-sized city with a cute downtown area, parks and open space. You’ll find charming restaurants opening in such an area, art galleries, plus many free entertainment options will sprout up in the shadow of the trees. You might say work and money are HOW we live, but culture and family are WHY we live. Don’t overlook it.

Aesthetic beauty

Not everyone will agree this is important, but to me it’s critical. Something about my temperament demands I live without being visually assaulted by atrocious surroundings. I paid way too much for my current house because I (thought I) needed to see the shimmering Puget Sound every day. Not unlike the importance of culture, living in a beautiful place brings a lot of light into your life and will make all those pretirement years that much more enjoyable.

I could probably come up with another 50 important things, but I’d rather hear from you about what you look for in a place to live. What am I missing? I’d really like to have a robust list of criteria because if and when I decided to move to a different locale, I want to make sure I approach my choice intelligently.

Let me know what you think in the comments! 

What is the best way to invest $100,000?

What would you do if someone handed you $100,000?
Do you think you know the best way to invest this money?

money3Americans have a unique challenge in life and have developed an adaptive skill that people from many other countries can barely even conceptualize. Although it’s a very real problem for we Americans, in many parts of the world they’d give almost anything to have this problem.

The problem: Too much choice.

The other day I spent 30 minutes looking around on Netflix for the movie that was an exact fit for my mood at that exact moment. We walk into our grocery stores and have to apply our well-honed, complex analytical skills to decide which cheese to purchase. Want cereal? Flakes or biscuit? Sweet or savory? Real sugar or HFCS? Should my eggs be cage-free or vegetarian fed? Both? But those are $6! Time to paint the living room? Choose from 10,000 unique shades of light brown! Whatever the choice of the moment might be, we in America spend a lot of our time wading through various buying choices and these choices are a reflection of our person and a projection of our aspirations.

I would flip through catalogs and wonder, “What kind of dining set defines me as a person?”
-Jack, Fight Club

If you’ve ever seen a recent immigrant shopping in an American supermarket, it can be fascinating. Often it’ll take them forever to make a decision as they carefully wade into this sea of decision-making. Those of us who have been running this gauntlet for some time now have built up resistance to the sensory overload that is a modern store. We can usually zip through using well-tread criteria and remain unscathed.

When it comes to deciding the best way to invest, it’s not always so easy

Since I recently sold my fourplex, I now have some investment funds to redeploy. After cleaning up some other financial loose ends, I’ll have about $100,000 to invest elsewhere. Getting to this point was easy compared to the next step of actually pulling the trigger. (Incidentally, the first step in getting organized in investing is to sign up for a free account with Personal Capital so you can get a handle on your current situation. You can learn more here.)

Like a freshly arrived Somalian’s first visit to a Seattle Safeway, I’ll admit to being somewhat overwhelmed by my options. So I turn to you, readers, to help me out. What’s your advice for someone with a chunk of change in his pocket?

I’ve been considering a few different options over the past few years I’ve been trying to sell the fourplex. Many of them I was completely ready to move on at various points but since I couldn’t access the funds, they never happened. Some of those ideas have been completely dismissed while others are still being considered.

A few of my favorites:

Is more real estate the best way to invest this money?

Real estate is like a drug, and I’m hopelessly addicted. I love how it’s in my control (mostly) and I love how it’s tangible. With my own effort, I can enhance a property to increase its value. During the depth of the real estate crash, I was licking my chops at some very underpriced single-family homes, particularly in the city of my birth, Vancouver, Wash. Check out the inventory! There are a ton of decent houses available for less than $200,000 right now. Using my funds and tapping our home’s HELOC fund, I could pay cash* for one of these babies. Hard to resist! Rents in that area are pretty low, at maybe $1,200/month for something pretty nice. I could basically earn a 5%+ yield (although surprises always await with real estate!) and potentially also get some additional gain from equity growth as the market improves in that area.

(Interesting side note about this area: A few months back I was looking at what kind of inventory was available and I noticed almost every listing’s status was “short sale pending”. Page after page of listings. Then I read about how companies like the Blackstone Group were buying in big to the single family housing market and renting the homes out. I’m pretty sure these big investment firms were single-handedly driving up the prices. If I could have sold my plex a couple years ago and pounced, I could have already made well over $100,000 down there.)

So if I get lucky, I could earn something close to what I could earn investing more traditionally PLUS there is the potential to hit another jackpot. If the economy got quite hot in the Portland-Vancouver area, a price increase of $50,000 to $100,000 isn’t out of the question. But if the economy was doing that well, a stock market investment could do quite well also.

On the other hand, if I get unlucky, just a few repairs could wipe out every year’s income. Or, even worse, I could get dragged into negativeland and would need to cough up cash to support the endeavor. Additionally, the sporadic, unreliable income is what made rentals so unappealing with my fourplex. If I’m only going to earn 5% or less, I’d better not have to take a bunch of annoying phone calls to get it.

If I went this route, I’d plan to hold for three years minimum, and hopefully five years maximum.  Hmmm…

What about REITs?

Instead of buying real estate that I have to personally deal with, buying Real Estate Investment Trust funds might be the best way to invest this money. These funds let you be invested in real estate and as an investor with others instead of holding the bag all by your lonesome. I have a few REITs already but hadn’t bought in further because I was already so deep in real estate. I’m still considering this direction.

Why not just buy individual Dividend stocks?

If you read my post on Dividend Mapping, you know I’m somewhat entranced by dividend stock investing. Yes, like any investment it carries some risk and has its own share of pros and cons. My favorite things about dividend stocks are that they’ll continue paying as normal whether the price goes up or down. From an income standpoint, it’s a little more “controlled” in the sense that the dividends drip in like clockwork, helping me avoid some of the wild swings of real estate. That stability alone is worth something to me after dealing with the roller coaster of real estate income over the past decade.

I’ve done a bit of looking around at what individual stocks I could pick up, in a modified version of Dividend Mapping. Really it’s closer to creating my own mini mutual funds. I’m pretty happy with my selections so far. I found some stocks that I wouldn’t have otherwise noticed that I really like. So why not just buy in? Well, my track record of buying anything outside of a fund is atrocious. You know how it always rains after you wash your car? That’s how it is with me and stocks. I used to joke to my friends that they’d better sell because I was buying in, thereby guaranteeing a drop. Yes, it’s been that bad. So that eats at me when I consider pulling the trigger.

Could a good ol’ fashioned Vanguard fund be the best way to invest?

In what is probably the simplest approach, I could just buy into one or more Vanguard funds, such as the Total Stock Market Index (VTSMX). They are tried and true and in some ways this would be the lowest risk approach. They also have some managed payout funds that I haven’t really looked into yet. Probably the smartest thing to do from a traditional investing perspective would be the classic combination of total stock market, bonds, some international, etc. to provide the diversity needed down the line.

So on the plus side, there are solid, relatively safe investments available. On the negative side, I’ve felt like we’re overdue for a market correction and buying in now would almost guarantee it! If the market took a fairly big dip, that would certainly make my decision easier.

How about a combo platter?

Naturally combining several different approaches is often the best way to go. It gives you good solid diversity and also lets you catch a wave if a particular sector takes off. But what combination?

I could also dollar-cost-average my way in to some of these choices to protect myself from a sudden drop, but that entails leaving a big sum of money uninvested.

So how do I decide on the best way to invest this money?

I’ve (obviously) never been a very skillful investor. I did well investing in myself (education and career learning) and I got lucky more than once. My lack of confidence in market investing pushed me toward real estate and I was fortunate that my timing coincided with a low interest rate era that caused a big housing spike.

The interesting thing about my current conundrum is that had I received the same amount of money over a number of years, it would be much easier to decide where to put it. It’s the Power of the Chunk in action! Get a big chunk all at once, the stakes immediately seem much higher! Taking a big hit in the market would hurt much more after dropping in a big sum of money than it would before I was using it as income and when it was just a collection of smaller investments (if you follow me).

So here I am, looking at my various options, thinking about what to do next. I can tend to be an over-analyzer and the waiting carries its own danger as well. I’ll be sure to let you know what I decide!

What do you think? What is the best way to invest $100,000? What would you do if someone stopped by your house and handed you a check for $100,000?

Let me know your thoughts in the comments. And if anyone wants to write a guest post on this topic, send me a note through the contact form. I think it’d be great to have a few different voices weigh in on this topic. 

*Paying cash isn’t my first choice, but last time I checked, the credit market was so tight that getting a loan was near impossible even though I wouldn’t be using my income from working to pay for it even if I had a job. It might be possible these days, but I haven’t looked into it. 

Pretirement story: Planning a move to Spain

Hey, everybody, today I’m sharing a guest post from Buck, the writer behind one of my favorite blogs, Bucking the Trend. One of my favorite things to do on Pretired.org is share interesting stories of pretirement, such as the recent story of my friend Rebecca who gave up her fancy corporate job to move to Mexico

Buck is planning to pack up his family and move to Spain and is well into the planning and preparation stage. Read on for his story and be sure to share your thoughts and advice for Buck in the comments! 

Introduction

buck-spain

Earlier this summer, Pretired Nick and I were comparing notes.  We share a goal of living abroad with our families and he asked if I’d do a guest post.  This is the latest on our story.

The tagline on my blog says “Save. Invest. Retire @ 42. Move family to Spain.”  If everything were to go exactly as planned, we would reach our goal in the year 2017 or thereabouts.  We all know things rarely go “as planned” but it’s good to set goals, right?

This was the plan up until about a month ago when my wife and I decided to turn everything on its ear.  The tagline should now read “Save. Invest. Pretire in 2014. Move family to Spain.”

The Goal

For as long as my wife and I have been married, we’ve had a goal of living abroad.  We tried to navigate our careers so that we could live and work in a place other than the U.S. but the stars just never aligned to allow us to do it.

Our plans were put on hold with the birth of our twin boys a little over 8 years ago. Now that they’ve grown and we have some money in the bank, we’ve been able to rekindle our dream to include the entire family.

Our goal is to move and immerse ourselves in a Spanish-speaking country for at least one year starting in June 2014. The following are some of the questions we’ve asked ourselves that have led us to this decision.

Why?

I went on my first trip abroad during my sophomore year in college. And while it was only a month-long whirlwind tour through some parts of Western Europe, I returned with a new appreciation of different cultures.  It also struck me how most everyone we met that was close to my age was able to speak English – at worst in a conversational way, at best with an authentic British accent.

I learned that many countries teach English at very young ages, most at the start of any sort of formal schooling around age 5. I thought this was wonderful and vowed to give my kids the gift of bilingualism and the time to take in a different culture and all the things that go with that (language, food, people, sites, etc.) I think this experience will go a long way into making our sons more well-rounded.

Why Now?

Like many big decisions in life, there is rarely the perfect time to do something like this.  The more relevant question when I first brought it up with the wife was why not now?

As we evaluated our original plan of waiting another 4 years to move, we started seeing bigger issues that would potentially be roadblocks. Two of the bigger considerations were:

  • Age of our boys. The twins just started 2nd grade and the thought of waiting until they were nearly teenagers seemed like it would be more impactful both from a schooling and social perspective.
  • Age of our boys’ grandparents. We are very fortunate to have both sets of grandparents with us. Everyone is in relatively good health but with ages already in their early-to-mid 70s, no one is getting any younger. To wait another 4 years to make this move would push the elder grandparents closer to their 80s. Besides, I think they are excited to have a new place to visit their kids and grandchildren as well.

Why Spain?

Because our twins are in their third year of a Spanish-English dual language immersion program at their school, it’s only logical that we seek out living in a Spanish-speaking country. This experience should cement their fluency in the language.

While we have several target countries in mind (most of which are in South America), Spain remains #1 on our list.  I spent some time studying and working in Madrid nearly two decades ago and my wife and I have been back a couple of times since. There is something about the Spanish lifestyle that appeals to us and I suspect it has something to do with siestas, jamón serrano, and the nearly 3,000 hours of sunshine that pours down on southern Spain every year.

How?

You know how most personal finance blogs at one point or another always mention the word ‘freedom’ that financial independence brings?

While we aren’t yet financially independent, we’re taking advantage of the freedom that our savings has enabled. We’ve fully funded our tax-advantaged retirement and are diligently saving almost everything going forward in cash to be able to qualify for the needed visa. More on this in the next section.

To get into some specifics, we have about $90K in taxable investments and another $50K in cash that is more than enough float us for a year or two while abroad.

As long as we don’t end up in one of Spain’s larger cities (Madrid or Barcelona), it appears that living in Spain may actually be cheaper than our current location in the U.S. Rents in Andalucía appear to be reasonable and my goal is to live in a town/city center where we can walk or bike as part of our daily routine without the need for a car.

Next Steps

At this point, we have a lot more questions than answers and are glad to have the better part of 9 months to put a plan in place and make it a reality. The following are the most immediate to-dos at the moment.

  • Visas – Figuring out the needed visas is the first priority. We’re leaning toward applying for a non-lucrative visa. This is a one-year visa typically granted to retirees who have ample savings (or passive income) to support themselves.  This visa does not allow you to work in Spain. We’ve done our best to save enough money to live on for a period of time that I’m hoping we can qualify.

While I haven’t found it spelled out in black and white, it seems the magic number is around $85K in savings plus an additional $15K needed for each dependent. If my math is correct, that means our family will need to prove a savings of around $130K to be able to qualify for this type of visa.

  • Schools – Apparently there are three main options when it comes to schooling in Spain:  public, semi-private, and private. We need to determine which option we can afford and which is going to be best for our boys given our goals (to learn the language and culture).
  • Immersion – Even though we have the luxury of not working, I still think it is important that my wife and I find ways to become part of the community. To this end, I’ve found several programs that hire native English speakers to be part-time language assistants in schools around the country. I’m thinking this may help us get some immediate contacts in the area that may be more difficult to obtain on our own.
  • Stuff – What are we going to do with our house and all the stuff it contains? Since we plan to return back to the U.S. at some point, the current thought is to rent out our house and put anything we want to keep in storage.

Fears

As with anything new, we have our list of fears and unknowns. Will we miss our friends? Will we hate it? Will we love it? Will we ever come back? (That last one is my mom’s fear and not necessarily mine).

Admittedly, this prospect “terrifies the bejeezus” out of my wife (her words). But at the same time she is up for the challenge and equates her fear to the nerves and anxiety that our children regularly have to face, but which we avoid as adults. It seems only fair that we should also be put in uncomfortable situations in the name of growth and new experiences.

Thanks for reading. If there is anyone out there who may have a bit of advice for us about Spain or any other Spanish-speaking country that you think should warrant our time in research, please comment or reach out to me directly via the Contact form on my blog. ¡Muchas gracias!

Pretired Nick here again. Well, what do you all think? Is Buck on the right track? Any advice for him as he plans this move? I was in Spain a couple years ago and also fell in love with the country. When I researched a move to Spain I found very challenging visa issues and a barely functioning bureaucracy to complicate matters even further. Buck has a lot of these issues figured out already and I know I can’t wait to read the posts when he packs up and makes his move to Spain!

Also, for anyone else considering a move to Spain, I do highly recommend the book Moon Living Abroad in Spain (affiliate link). I read it from cover-to-cover when I was seriously looking at making the same move. Although my plans to move to Spain are on hold, I still highly recommend this book.

Tame your housing costs to ensure a safe pretirement

How do you bring housing costs under control?

tame-housing-costsI realize looking back on my more than 5o posts so far that many of them are about or related to real estate. That shouldn’t be a surprise, I suppose, since housing costs will be what drags you back into the working world if you’re not careful.

Whether you rent or own your place, housing is likely eating up a good chunk of your monthly budget. The traditional rule of thumb for a mortgage, for example, is around a third of your income. They used to say 25% for renters, but I doubt that’s very realistic these days.

Even worse, as you head into a lower-income, but much happier, pretirement lifestyle, a surprise increase in your housing costs could crush your newly-found freedom.

I talked about this issue a bit in the old Pretired.org classic “Pop your own housing bubble“, but that was mainly about bringing your housing costs down in general, not as much about ensuring you keep control over expensive surprises.

There are a few common ways your housing costs could explode on you:

  • Rent increase
  • Interest rate increase if you have an adjustable rate mortgage
  • Property tax increase
  • Assessment or increase in HOA fees if you’re in a condo
  • Sudden need to upgrade
  • Remodeling or repairs
  • Spike in utility costs

Obviously your housing costs are going to rise over the years if for no other reason than inflation and maintenance. The trick is to bring them under control so they’re not a worry. And that can mean some tough decisions as you prepare to leave the working world. (Or in my case, after.)

Let’s run through a few approaches to keeping your housing costs under control. If you have some additional thoughts to share, be sure to add them in the comments.

Buy a home

There are a lot of advantages to renting. Particularly if you’re young and working in an expensive area of the country, buying can be a big waste of money. However, if you’re beginning to look toward pretirement and are still renting, it can be worth considering a purchase.

For young people working in expensive cities, one idea is to buy a home where you think you eventually want to settle down. Keep that place rented while you’re working. When you’re ready to leave the corporate world, boot your renters and move into a hopefully paid-off house! It’s a great alternative to buying in an overpriced city. If you think you’d like to pretire to a vacation-oriented community, that’s an even better reason to buy-in early if you can.

In general, however, and especially for older folks, deciding to buy and reaching mortgage-freedom as soon as possible will lower your monthly costs, dramatically bringing pretirement that much closer. And more importantly you’ll remove the risks of rent increases and evictions so you don’t need to worry about suddenly finding more income.

One other advantage to buying is that an owned home can be rented if needed. That could take the form of renting a spare room or simply living in an apartment or with family while someone else pays you to live in your house. You may not ever want to make that move, but it’s nice to know it’s there if you need it. In our case, we have considered living overseas for awhile at some point. The rent from our home here would easily cover our rent nearly anywhere else in the world and in some areas would cover our entire living expenses.

Control rent increases

If you’ve decided to remain a renter, there are still some ways to keep rent increases somewhat at bay. Now the first thing flashing through everyone’s mind is to sign a long-term lease. That can protect you to some extent, but it has some obvious downsides (although I burned two landlords back in my renting days so being locked into a lease isn’t as scary as you might think — it’s mostly there to protect the renter).

But there are some other options available to you. If possible, it can be worth finding a city with some rent controls in place. That will at least put you in a situation of gradual rent increases, vs. steep, sudden increases.

Additionally, I’d recommend looking for a landlord that isn’t part of a big rental management firm. These firms are incented to increase rents year after year and to keep up with the market. If someone moves out due to a rental increase, they actually are fine with it as they can go in and fix all the stuff you’ve been complaining about and then rent it for more money. In contrast, individuals who are renting out a spare home independently are often terrified of losing a good, reliable renter. It’s not unusual to find people who have been renting from the same people for decades with no rent increases. In addition, an independent landlord is very unlikely to pursue legal remedies if you walk away from your lease.

But all of that said, generally speaking I find renting a greater risk for a safe pretirement than buying.

Pay off your mortgage

Now obviously if you have a passive income source that covers your mortgage payment, you could say your housing costs are already under control. For example, if you’re one of those investing ninjas who keeps your home leveraged at a low interest rate so you can make a little extra margin in the market, you could argue you’re under control already. Unless, of course, your income source takes a hit. Say you’re a growth investor who has been averaging 6% in the market and have your house on a 30-year mortgage at 3%. Good for you! But, say we hit a big market downturn. Say it happens after your working career has ended. In effect your housing costs just shot upward. This is why I advocate paying off a mortgage, especially for anyone over 40. Getting rid of your mortgage just takes that risk off the table. Should you wish to remain leveraged to keep your pretirement fund growing as quickly as possible, I still recommend paying your mortgage down to a controlled amount, say $100,000 or so. This will help limit disaster if we hit an economic rough patch.

For some thoughts on how to pay off your mortgage quickly, see my old post on How to get rid of your mortgage.

Condo owners – watch out

I’ve never owned a condo so I don’t consider myself an expert in this area. That said, I have heard many (many!) horror stories over the years. Enough to where I think I have to add a few thoughts about condos here.

A quick note, first, however. Despite these unique risks of condos, they in some ways pale compared to the risks of owning a single family home — particularly in repairs and improvements. For every sudden $30,000 assessment there are 10 stories of surprise roof replacements. In return the smaller size and limited things to remodel have a natural built-in cost control component.

So as we all know, the two biggest surprises (if there are any others, let me know) to come along related to condos are increases in monthly dues and surprise assessments. I don’t know of any magical ways to avoid these once they occur, but by doing your homework before you buy, you can avoid some of these. I don’t think it makes a lot of sense to buy into one condo over another because the HOA fees are a bit lower. Low fees could mean the condo isn’t keeping up with maintenance which could in turn trigger an assessment. Look for reasonable, mid-range fees and a very well-maintained building. Most condo buyers only have their own unit inspected, but I’d see if I could get my home inspector to walk around the property a bit and look for potential big problems. Failing siding, decks or windows or just a general look of disrepair.

Remember that with real estate, what seems cheap can be very expensive! Buy quality, do your homework and you’ll be fine. Oh, and you may want to maintain a slightly larger emergency fund just in case.

Property taxes – ugh

Here in Washington state, we have an odd taxing structure. It’s a super screwed-up approach to taxation that keeps placing us on top of lists of most regressively taxed states, despite our being one of the most liberal states. This is because we stupidly have no income tax. Since our blissful liberal population wants to take care of its people and infrastructure, it forces governments to lean heavily on the only tax mechanisms available to them: sales taxes and property taxes (and fees such as car licensing and tolls, but that’s a minor issue). Anyway, the point of this is that not only are our property taxes super high, they are also continually going up. My half of our monthly property taxes is $220 — that is by far my largest monthly expense!

As long as I stay living here, my options for controlling this expense are fairly limited — thank goodness I don’t have a mortgage payment to make every month on top of that! I could challenge my assessed property value but that would have a tiny impact even if I won. No, unfortunately my best bet is to move. To a cheaper property and potentially to a place without such a high property tax. If we decide not to move, then I need to do some rough math on how much this expense is likely to grow (apply historical percentage increases forward, for example) and make sure my pretirement plan accounts for that.

Buy the right house for your needs

In Pop your own housing bubble, I wrote about how important it is to think about what you NEED vs. what you can afford. But beyond simply lowering your housing costs, it’s important to think about what life changes you might experience so you buy something that fits those needs. There are a few things that can happen in life that could drive a surprise expense. The most obvious, of course, is children. If you’re a pretirement over-achiever and put off having kids until you were financially independent, my hat is off to you. But you could end up rushing back to the warm embrace of a corporate job if you forgot to buy a home that was kid-ready. Even though your career was “ended” you might find yourself in need of a house that costs $100,000 more than what you’ve got today. Another, not as happy, example is thinking about aging. My inadvertent house flip had a major flaw: 20+ steps to the front door from where you park. Living pretired in a house like that could leave you in major trouble should age or an accident leave you unable to get to your own front door without help. Or the issue could simply be one of distance from work or the grocery store. Think about these issues early so you don’t get caught.

Remodeling, repairs and other risks

Fixing up houses is an addiction. It’s an addiction I have struggled with most of my adult life. I wish I could say I’m a recovering remodeler, but unfortunately my basement tells a different story. So I know very well that houses are often nothing more than rickety boxes you fill with your life savings. So what can you do?

First of all, try to buy something that doesn’t need a lot of work — especially if you’re 40 or older. Save the big mistakes for the young people!

Next, do fix things that need fixing — and fix them early and do it right. The clearest example I can think of is your roof. Before you quit your job for good, maybe you go ahead and spend the money on the roof replacement you’ve been putting off. Spring for a little higher quality and you might not ever need to touch it again.

Similarly with “nice-to-haves” — an updated kitchen, say — take care of these projects before you move into pretirement. You’ll want to live for a long time without an expensive project, so get it done early and do it right so you don’t have to come back to it later.

Bottom line: make a list of these potential timebombs early and attack them one-by-one before you pretire so you’re not caught scrambling later on.

Spend money to get utility costs under control early

I hate telling you to spend money, but utility costs are another area that can bite you if you’re not careful. If you lived through the 1970s like I did, you know what an energy shock feels like. We North Americans tend to get pretty complacent about energy when it’s cheap, like it is today. But regardless of when you think the next big surprise will happen, I think we can all agree on one thing: it will happen rapidly.

The thing about energy is that it’s such a commodity that when a ripple goes through the system, the speculators inevitably rush in to snag their share of the profit. So you see sudden, shocking spikes in cost. Should we have a sudden water crisis, the impact could be even more devastating. Those of you living areas of the country that are susceptible to drought or communities that live near where they’re poisoning the water sources by fracking really need to watch out for this.

If you’re still working, this is an issue, but not necessarily a life-altering one. If you’re pretired and need to keep expenses under tight control, this could be devastating. Your approach to controlling your utility costs will vary a lot by area of the country and type of house. But here are a few ideas to think about:

  • Drop your electricity use to the bare minimum. Swap out all light bulbs for LEDs, use a clothesline instead of a dryer, be very careful about leaving anything turned on unnecessarily. You can use a Kill-a-Watt device to measure the electrical usage of individual appliances and pinpoint where you can save. You might even find that upgrading your refrigerator or other appliance could make financial sense.
  • Consider home power generation. I’m dying to do this, but since we may not be staying here long-term, I’m holding off for now. The price of solar panels has been dropping rapidly and it makes a lot of sense to install your own panels now. If you wait a couple years longer, it may be idiotic to not do this (assuming your house gets some sun). Small wind is another great way to generate power at home. The two approaches together work quite well as wind tends to kick up when the sun isn’t shining.
  • Manage your heating and cooling costs tightly. We upgraded our furnace to natural gas (over the original 50-year old oil furnace) a couple years ago. I estimated it’d take around three years to break even, but more importantly to me was that the ongoing cost was lower and the added efficiency would help us avoid sudden expenses. We also have portable electric heaters that can be placed in bedrooms for an added boost or as a substitute should natural gas skyrocket.
  • Manage your water smartly. Very similar to electricity, managing your water usage tightly so you can get by on the bare minimum could be essential if water rates skyrocket. Showers and toilets are probably the first places to look.
    I also like the idea of storing water on-site. You condo people are kinda screwed, but you should at least have some emergency storage containers available. For those of you living in single family homes, though, installing some cisterns on-site can be pretty smart. I’ll only do this if I decide we’re definitely staying here, but it can make some smart sense, especially if you garden. I really like the idea of having enough water to get us through the summer, say 300 gallons or so. It’d be perfect for watering your garden or for emergencies. But in times of water rate spikes, you could even use this water for flushing toilets and cleaning if needed.

Well, that’s a pretty long list of things to think about already. I’m sure there are many other ways to control housing  costs that I didn’t mention here. Just remember, housing is typically the largest expense in your life — bring it under control to ensure that once you’ve pretired you can stay pretired.

Let me know what you think are the most important ways to bring your housing costs under control in the comments!

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