Now that I am a widow, do I need to sell my house? It is a scary question and can feel devastating. However, it is answerable. Most widows will undergo decreased income and their previous financial balance is almost always disrupted in some way. The last thing you want is to experience long-term deprivation because you are struggling with your finances, wondering if you can afford that latte, smoothie, or dinner out with friends. Unfortunately, housing issues can be a major point of pressure, especially from adult children who are “campaigning” to sell the house: “Mom, you need the money,” or “You’re not safe alone.” This is a topic fraught with emotional hooks and quite stressful.
I want you to “know your numbers” so that you can make the decision yourself on what option is most meaningful to you. By doing the calculations to bring your finances into balance, you know where you’re starting from and where you need to adjust. A fresh financial look helps to provide clarity and organization so that you have an easier way to evaluate whether you can afford your home. It works because it’s all about having enough. Enough to pay the bills. Enough to have a little fun. Enough put aside for the future. Enough to feel real confidence. Sounds good doesn’t it? Once you have clarity by reviewing your current financial situation, you can start developing a plan of action. This article takes you through five steps for understanding your finances and answering that all important question.
Step 1 — Calculate your after-tax income
Your after-tax income is the amount you collect after taxes are taken out of your income. The three most typical scenarios for a widow are employed, self-employed, or retired. If you are an employee with a steady paycheck, your after-tax income is easy to figure out. Add back in health care, retirement contributions or any other deductions taken out of your paycheck (such as life insurance). If you’re self-employed, your after-tax income equals your gross income, minus your business expenses, minus the amount you set aside for taxes. If you are retired, use your tax return to take the amount on line 37 (adjusted gross income) and then subtract the amount on line 63 (total tax).
Here is an example. Sara, widowed and age 55, is still working. Both her children are grown and out of the house. Her current salary is $51,000 and she receives $9,000 in dividends and interest before tax from her financial assets, totalling $60,000 gross income. Her annual taxes are $8,225 federal income tax + $4,590 FICA & medicare tax = $12,815 total taxes.
The final calculation is $60,000 income – $12,815 taxes = $47,185 after-tax income annually or $3,932 per month.
Step 2 — Discover your actual money distribution
You will need a completed current income and expense sheet. Next, you will calculate three expense areas: Housing, Everyday Essentials, and Credit Cards & Contractual Obligations.
Housing: First, using your income and expense sheet, calculate how much you spend on housing (rent, mortgage payments, property taxes, homeowner’s insurance, association fees, utilities, lawn maintenance and upkeep for anything that has to do with the home). Do not include cleaning service, internet, cable, or home furnishings. Write that total down.
Sara’s mortgage payment is $725, property tax is $255 monthly, homeowner’s insurance is $120 per month and her homeowner’s association fees are $67/mo. Sara’s utilities run an average of $200/mo. Her lawn, pest, and tree-care is $150/mo, and her pool maintenance she does herself for about $30/mo. She estimates about $50/mo for unexpected maintenance issues. Her total housing costs are $1,597 per month.
Everyday Essentials: Add up what you are spending on medical insurance and care, groceries, car payments, auto insurance, and gas for basic transportation needs. Write that number down.
Sara currently has no car payment but does pay $103/mo for auto insurance and an average of $160/mo for gas. Her groceries (food only, not sundries) total about $260/mo. Sara’s cost for health insurance with her employer is $330/mo. Her out-of-pocket medical costs total about $60/mo. Sara’s total for her Everyday Essentials is $913 per month.
Credit Cards & Contractual Obligations: Finally, add up payments for any other insurances you pay and any on-going legal obligations you have currently such as student loan payments, credit card minimum payments, cell phone contracts, gym memberships, child care, appliance payments, etc. Write that number down.
Sara’s credit card minimum payments equal $90 per month. Her gym membership is $27/mo, her cell phone contract is $81/mo, and she walks for exercise instead of paying the local gym. Her Credit Card & Obligations total $198/mo.
Step 3 — Calculate your Core Living Expenses
Total the monthly amount of the three categories above.
Sara’s Core Living Expenses are Housing $1,597/mo + Everyday Essentials $913/mo + Credit Cards & Obligations $198/mo = $2,708/mo.
Step 4 — Determine the percentages of where your money goes
The final two calculations determine the percentages of where your money goes. You will find all these calculations above: Core Living Expenses (Step 3), After-Tax Income (Step 1), and Housing (Step 2).
Calculate your Core Living Expenses percentage. Total of (Core Living Expenses divided by your After-Tax Income) X 100. Write that percentage down.
Sara took her total costs for Core Living Expenses ($2,708/mo) and divided it by her after-tax income ($3,932/mo) X 100 = 68.87%. This means that 69% of her income is currently being used to cover her living essentials.
Calculate your Housing percentage. Total of (Housing costs divided by your After-Tax Income) X 100. Write that percentage down.
Sara took her total Housing expense cost number ($1,597/mo) divided by ($3,932/mo) X 100 = 40.62% This means that about 41% of her income is currently being used to cover her housing costs.
Now that you’ve done all the math, balancing your money is the key. There are two critical numbers to look at when you are deciding if you can afford to keep your home.
Core Living Expenses percentage – For good financial balance, this number is best at 50% (or below!) of your after-tax income, which includes your Housing cost. If it is higher, start by looking at possibilities to either reduce your Housing costs or increase your income.
Housing percentage – For good financial balance, this number is best at 30% of your after-tax income. This is the key number when considering to keep or sell your home.
For Sara, her numbers are not too far off. She is 19% over her recommended 50% allocation to Core Living Essentials. Much of this is because she is close to 11% over the recommended Housing percentage. Working with her advisor she can evaluate solutions to help re-align her financial balance. She may receive life insurance proceeds that can help pay off her mortgage to reduce her housing percentage. Before paying off her home, Sara should do a comprehensive cash flow analysis to determine she can still afford her home in retirement once she begins to receive social security benefits. Alternatively, her financial planner may be able to increase her income by repositioning some of her financial assets until age 60 when she can begin to receive her widow’s survivor benefit. Now that she knows her figures, Sara can also explore selling her home, to downsize and live closer to the park where she loves to do her walking. The point is, she now has the power of choice because she “knows her numbers” and has the guidelines to make wise decisions about her financial future.
The big picture of your finances overall can best be evaluated with the “50/20/30 Money Balance Formula”. Over the last 22 years, it is the best approach I have found to help clients redirect their finances toward a fulfilling life. It is from the book, All Your Worth: The Ultimate Lifetime Money Plan by Harvard professor and bankruptcy expert, Elizabeth Warren, and daughter, Amelia Warren Tyagi.
Core Living Expenses: keep at 50% (Housing, Everyday Essentials, Credit Cards & Contractual Obligations)
Financial Goals: save 20% (retirement savings, debt reduction, education savings)
Embrace Life’s Fun: spend 30% (renewal of your dreams and aspirations)
It’s that straightforward. And it works if you are a widow age 20 or age 80. Why do we use it? Because It’s sustainable, it’s safe, and it has been tested over time. It allows flexibility during times of financial emergency or change. You will always have room to maneuver. You are in control and that helps you get back to the journey of emotional well-being. When your money is in balance, you realign with “having enough”.
In conclusion, the goal is to get your finances, not into perfect balance, but as close as you can for the first three years of widowhood. This allows you to discover what you want in your life as you move forward on your own. The 50/20/30 plan makes it clear, detailed, and specific. Unless it is an extreme financial circumstance, wait for at least one year after your husband’s death before deciding to sell your home.
All wealth is attracted to clarity – emotional wealth, physical wealth, spiritual wealth, and financial wealth. When you begin to see clearly and build a blueprint of what you want, you can then tackle those big decisions more easily and with less stress. I encourage you to work with a professional financial advisor as you review your options for keeping or selling your home.
Personal note from Laura – I get this is a weighty topic to tackle! Please, post your questions. Send me an email. I am glad to help. 🙂
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Any opinions are those of Laura Amendola and not necessarily those of RJFS or Raymond James. The above hypothetical client example is for illustrative purposes only, and does not represent an actual client. Actual investor results will vary. Raymond James is not affiliated with nor endorses the book “All You Worth: The Ultimate Lifetime Money Plan” or it’s 50/20/30 plan.
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