Housing: The Biggest Piece of Your Financial Picture


Key takeaway: “How much should I spend on housing?” The old answer was to buy as much home as you could afford. The new answer is to weigh the long-term ramifications of spending more versus less on a house today. After all, homes do retain values—your values, though not necessarily the monetary value past generations saw.

How much should I spend on housing?” is a question I often hear, both from first-time homebuyers and retirees. The answer, as it always is with financial planners, is: “It depends.” It depends on a host of factors, including your approach to saving and your vision for life both now and later.

Some people choose to be house poor. Sometimes they are homebodies who do not spend a lot on traveling, entertaining, or going out to restaurants, concerts, or movies.

Some people choose to be house poor because they know that without the forced savings of a mortgage payment contributing to their equity, they will not save enough on their own. Left to their own devices, they would wind up spending everything and then not have enough saved in the form of home equity to fund whatever they need in retirement.

Other people choose to make their housing payment a smaller percentage of their income because they travel more and go out more—they consciously choose to spend less time in a smaller home. And, hopefully, they are also disciplined and saving money outside of their housing payment since they will wind up with less home equity by the time retirement rolls around.

The baby boomer generation used to recommend buying as much home as one could afford. Their experience was that they had jobs that were stable and provided healthy raises each year. Add to that the high inflation in the late 1970s and early ’80s, and their homes were increasing in value.

Now it’s harder to provide that advice, as younger generations change jobs more frequently and markets are more vulnerable to the pace of economic change. For example, buying in Seattle or San Francisco is a huge challenge due to the tech bubble, while in Detroit homes are no longer worth what they once were.

Detroit’s population is 36% of what is was 65 years ago. Could that happen to Seattle or San Francisco? And could changes in tech, which come so quickly, exacerbate the problem? It’s nearly impossible to predict bubbles and declines, especially with housing, which some consider an investment and others simply consider a home.

As financial planners, we often hear housing questions from retirees. When you are no longer earning an income and instead living off your portfolio, the impact of a housing choice is even more significant than when you were working.

Is retirement when you downsize your home, or is it when you finally upsize to a home that you have time to maintain? In the latter case, are you unnecessarily taking on extra expense because you inevitably must pay more people to maintain a larger home? Are you downsizing to a condo to spend more time at a second home?

Rather than asking what percent of your income you should spend on housing, your decision should come down to what you want your retirement to look like. What are you planning on and hoping for and dreaming of? And that, ultimately, is the key to the question, whether in retirement or just starting out.

Your home is where you live. After you make sure that it fits your budget and values, where you live has a huge impact on your daily satisfaction. Your home is the biggest piece of your financial picture and provides the foundation to your life—where you start and end your days, where you return to after vacation, and where your family builds memories. If it does not place your financial plan in jeopardy, those factors outweigh the numerical answer of how much you “should” (according to “experts” who do not know your life but who often write clickbait articles!) spend on housing.

Ellen Osthus Fee, CFP®, is an Associate Wealth Partner, helping clients to achieve their vision for retirement and reach their financial objectives such as cash flow and estate planning.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.