Author: Nick Pagano
Topics: Family, Major Life Purchases, Life's Little Surprises
To Downsize or Not to Downsize – That is the Question
To downsize or not to downsize? It is a growing question amongst baby boomers and retirees. The question is inevitable, because time stands still for nobody. Seasons of life change over time, and one day we will all find ourselves asking that question more seriously. Ultimately, the answer is based on your individual circumstances. Here are some things to consider when making the decision.
Most Americans fresh out of school – or newly married with little money – start in a bare-bones apartment or rental unit of some sort. Over time, as a family grows in tandem with its income, a multi-bedroom house generally becomes the residence of choice. Later in life, the kids move out (one hopes) and the house is filled with more memories than people. Quite likely, there's no longer a need to pay the expenses that come with a large home. Once retirement fully sets in, individuals or couples often live on less income – often arising concerns regarding cash flow. Selling the home could be the perfect way to cut costs – but that’s not always the answer.
Circumstances to Ponder
1) The cost of selling. Selling your home comes with some pretty high costs. You’ll likely have to do some facelift/style updates to get the best price and you could have 6% or more in realtor commissions. If you make enough money in the sale, capital gains taxes could take a big bite out of your earnings, as well.
2) The cost of moving. Then, you have to purchase or rent somewhere new to live. If the new place is much smaller, you might end up needing to buy new furniture instead of just using what you have. Plus the costs that come with moving: closing costs, actual movers (and this time, you may need help with packing to spare your back), and many other incidentals that you won’t realize until you’re in the midst of the move.
3) The intangibles. Maybe moving to a sunny climate seems like a dream come true, but you’re leaving lifelong friends, family, community, and doctors with whom you’ve built relationships over time. The beach is nice, but having friends and family to spend time with is better – providing (of course!) that you actually like your friends and family. By the way, you probably think your house is worth more than it actually is, so check out the likely selling price with a few real estate agents, and maybe pay for a proper appraisal, before committing to the change.
All of this means one thing: You have to total all of the costs associated with moving to see if it makes sense. Every financial decision has two dimensions: mathematical and emotional. That doesn't mean that you won't end up profiting: A study from Boston College’s Center for Retirement Research found that downsizing from a $250,000 home to a $150,000 home is likely to net you about $6,250 extra per year or $520 per month – a sizable sum for the average retiree. However, numbers like these are purely hypothetical. You’ll have to calculate your own numbers to make an educated choice. Obviously, we at Gainplan have tools and the ability to assist you with these decisions. Additionally, we have helped many families through this decision.
The Bottom Line
As a retiree, you hope to be able to make some choices about how you live that don’t center around money. If you love your home and all the memories it holds, you might stay even if it makes little financial sense. Why? Because you can (the emotional dimension).
How do you know if you should sell? Let us help you crunch the numbers. We will calculate the upfront costs of moving and compare them to the yearly savings you’ll realize. A small gain probably isn’t worth your time, but a substantial savings might make sense.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.