One of the greatest accomplishments going into retirement can be having your mortgage paid off. Even when your mortgage is paid off, you’ll need to keep property taxes in mind. Since your budget is one of the most important numbers in retirement, you need to be clear on how property taxes can impact your long-term retirement plan. In this article, we will cover property taxes and how you might factor them into your retirement strategy.
One of Your Greatest Retirement Expenses: Taxes
Taxes are one of the greatest expenses you’ll have in retirement, along with healthcare costs. Having your mortgage paid off before you retire helps you build a solid retirement foundation, since a mortgage payment is typically your biggest budget outflow. When you turn 65, the school portion of your taxes might go away, but other taxes will still come in. For example, if you live near us in Central Texas, property taxes are so expensive that they can feel like a second mortgage. This is why it’s important for you to consider how you’re going to pay those taxes. Will you pay them monthly, into an escrow account? Or use some other method?
No matter what you do, it’s important to consider it because it is such a large annual expense. If you’re not planning for it, you might drain your cash reserves too soon. Or you may need to sell off equities to pay that bill, which can in itself create additional taxes. Since these decisions have trade-offs and can compound into a snowball effect, you need to be aware.
Planning to Potentially Have More Control Over Your Taxes
Taxes are inevitable. You’ll be paying taxes on your Social Security benefits, your IRA distributions, and more. However, at REAP Financial, we always emphasize that with the right planning, retirees can have more control over their taxes than at any other time during their lives. For this reason, you need to have a plan for how you’re going to pay your property taxes, what accounts you’ll use, and how you’ll be taxed on those dollars.
Impacts of Downsizing or Moving in Retirement
Another thing to consider: downsizing or moving. If you’re planning to downsize or sell your home in retirement, that can also create taxes. In Central Texas, you may expect to pay capital gains taxes when selling a highly-appreciated home. In addition to this, you need to be mindful of what your next steps are. If you sell and plan to buy a new home, will the proceeds of the sale of your original home cover the purchase or will you need to finance? Since interest rates are so high nowadays, if you’re going to finance, you need to think about how financing could impact your budget long term.
If you plan to move closer to family, potentially out of state, you should take those tax implications into account as well. If you move from a favorable environment, such as Central Texas, which doesn’t have income taxes, to another state, you need to consider the differences in state taxes. State income taxes can have an enormous impact. For example, we had a client who was going to move to the northeast, to a state with an income tax. After doing our long-term analysis at REAP financial, we determined the move would cost the client nearly $150,000 from his nest egg over his lifetime. Luckily, this client had enough saved that it did not significantly impact his plans, but it goes to show moving can have big implications.
You also need to consider where you’re buying and the property values. Some parts of the country do not hold their property values as well as others and may even experience downturns in value. Since many families count on their home equity towards the end of life, whether to pay for healthcare or simply maintain their lifestyle, it is important to predict how any property will fare in the long-term.
Get Trusted Advice to Maximize Your Retirement
Ideally, you’ll work with a fiduciary advisor or CPA, who can help you plan proactively and reduce your taxes where possible. Working with an advisor like this may give you confidence as to what money you’re going to live on in retirement and the tax implications of those choices. A comprehensive strategy might include lots of detail, such as the withdrawal order, laying out which accounts you draw from in what order. As you plan for retirement, consider taking all of these elements into account!
If you’re planning on maintaining a second home in retirement, perhaps a vacation home, we recommend you read our article, Tax-Wise Ways to Handle the Second Home. It’ll help you think through the unique considerations of having two homes in retirement.
Secure Your Retirement Plan with REAP Financial’s Guidance in Austin, Texas
If you’re nearing retirement in Austin or Central Texas, managing property taxes is a critical aspect of your financial plan. At REAP Financial, we offer tailored retirement strategies to help high-net-worth individuals prepare for tax implications and other retirement expenses. Our fiduciary advisors provide personalized advice to help you protect your wealth and maintain financial security throughout retirement.
For more information on how to incorporate property taxes into your retirement plan, contact REAP Financial today for a complimentary consultation. Let us help you create a comprehensive plan that supports your long-term goals.
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9414 Anderson Mill Rd #100
Austin, TX 78729
