Most people’s biggest asset is their home. It’s also their biggest expense. But the home is often one of the last things considered when planning for retirement.
There are plenty of reasons for this. Emotionally, it’s hard to let go of a home filled with memories. Moving is a hassle, and downsizing to a smaller home isn’t always the cash bonanza some might expect. As a result, many wait until well into retirement before moving to a smaller house or apartment.
But for many people, it can be better to downsize sooner rather than later.
The financial benefits may not seem huge at first, but over time they can make a meaningful difference in extending the life of a nest egg. As retirees age, there are lifestyle issues to consider, such as being in a community with other older adults. And finally, making a move before one spouse dies can help ensure that the surviving spouse, or the couple’s adult children won’t have to contend with selling a big house.
When it comes to downsizing, “if it makes sense, don’t wait,” says Steven Sass, an associate director at the Boston College Center for Retirement Research.
Some of the reluctance stems from the idea that trading a house with a paid-off mortgage for a rental or a condominium with maintenance or association fees will lead to higher monthly costs.
The comparison is not that straight-forward. In home many of the expenses are less obvious. It’s the regular maintenance, a roof, a furnace, heating and landscaping.
Often there’s a desire to hold on to a house where children were raised so that they – and the grandchildren – can come back and visit. Rather than clinging onto a three-bedroom and paying for the maintenance and heating, it’s cheaper to put relatives up in a hotel.
Trading for the more visible costs of a rental or condo can help with planning. You know what your fixed costs are going to be.
It doesn’t take a major downsizing to reduce costs, either. For many homeowners, property taxes have become a growing burden in recent years. Moving from a prime location in the central core can greatly reduce taxes. Many of the satellite towns can provide all or most of the conveniences of the large city with more charm and personality, and without the crowds and congestion.
Conversely, moving to a smaller, walkable central location from the suburbs can save on car expenses and provide the health benefits of walking.
Downsizing can have a big impact on a retiree’s financial plan. Even with a mortgage that has been paid off, housing can account for 30% of retirement expenses.
In addition to potential savings on expenses, an extra $100,000 after expenses could produce $4,000 annually (at 4%, which is fairly conservative). This article at RetireHappy.ca goes into more detail on the subject.
One of the biggest considerations is that the process can be physically and mentally exhausting, even at a young age. People often fail to appreciate how the aging process makes it harder to move, especially when people who are downsizing encounter the memories attached to belongings that they need to downsize.
As people age, illness or death can suddenly thrust a move upon them. This adds additional stress, and often other family members will need to help. And the process may have to occur quickly in these situations, which can be faster than the person is comfortable with.
And think carefully if you are considering downsizing to a smaller house and then buying a second home elsewhere. A second house doubles everything. It can be mentally, financially, and emotionally costly to maintain multiple residences.
Downsizing isn’t necessarily the right answer for you, but it’s worth keeping in mind for when the time is right.
If you have any questions, you’re welcome to call Eric Manherz at 613-601-6404 or contact us by email.