Since I retired from my financial
planning practice in 2007, I have continued to monitor the finances of one
retired couple. They live in a modest ranch home in a nice
neighborhood in Fairfield, Connecticut. They provide a good case study for the
millions of Americans in similar circumstances. Let’s just focus on their
expenses related to the maintenance of their home. The total annual housing cost
in 2017 was $37482.
Principal and interest payments on a
mortgage came to $20750, 55% of the total. This figure also included home
insurance. Payments on a home equity credit line, used for home improvements,
came to $1075. Real estate taxes came to $8650, 23% of the total. The real
estate tax has been deductible from Federal income for tax purposes, but that
deduction will go away in 2018 due to the tax reform bill.
Electricity costs $1499 for the year or
only 4% of the total. People complain about electric bills but they seem like
an incredible bargain to me given the importance of reliable electricity in
every aspect of our lives. Just remember how everything shuts down in a
blackout. No heat, no light, no refrigerator. You can’t even open your garage
door, much less charge up your electric car or your indispensable mobile phone
or device.
The water bill was even more of a
bargain. It was only $486, about 1% of the total. Not only is it clean and
reliable—we only have to turn on the tap and there it is-- but it is also a
vital necessity. We cannot live more than 4 days without water to drink. Moreover,
we use it to wash, clean, flush our toilets, and water our lawns.
The total phone and cable bill includes
TV, Internet, Mobile phone service, and a landline. It was a little under $2900
and represented 8% of the total. Yes, a landline is included for old time’s
sake. In today’s world these services seem almost as indispensable as
electricity and water.
The home is heated with oil and last
year’s bill was $2130, or about $5.80 per day. The burner is new and very
efficient but the weather and the price of oil can vary each year. Frigid
weather after Christmas will probably drive up next year’s bill unless the rest
of the winter is mild.
So, for a little over $3000 per month
this couple can live in a modest ranch home in a lovely neighborhood in
Fairfield, one of Connecticut’s nicest towns. Of course, this figure does not
include food, clothing, transportation, medical, or entertainment expenses. It
also does not include Federal, and State income taxes.
Speaking of taxes, starting in 2018, the
loss of the deductions for State and Local income taxes, as well as the limited
deductibility of home mortgage interest, will increase the cost of housing for
this couple. However, the increase in the standard deduction, and lower rates will limit the
damage somewhat.
What are the housing prospects for this
elderly couple going forward? Like many people over the past few years, they
have refinanced their home mortgage to lock in a lower interest rate for what
likely be the rest of their lives. That is a big plus to owning with a fixed
rate mortgage. The lowering of mortgage rates has resulted in more savings for
homeowners than any tax deduction.
Property taxes are beyond their control
as they will likely continue to increase every year. At first glance it might
seem that this is an advantage for renters, but increased property taxes are
inevitably passed along by landlords to renters in the form of increased rent.
Their utility bills are subject to
increases despite the fact that public utilities are regulated. However,
looking at the past it would appear that competition is a more effective way to
keep prices down than government regulation. Just look at the way the phone
companies are battling one another for customers. Or look at the way the cable
companies are being hard pressed to maintain their monopolies.
Other factors like old age, sickness,
and medical costs might drive them and others in the same boat out of their
homes. Until then, they will probably be able to maintain a comfortable, if not
extravagant lifestyle. I believe that millions of other Americans are in
similar circumstances. They live on a combination of Social Security, pensions,
and income from savings and investments.
They will be little effected by the tax
reform law. However, if the promise of tax reform comes true, the prospects for
their children and grandchildren will be better. More than just keeping their
jobs, they might find that higher employment will increase their income and
provide them with greater job freedom and mobility.
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