Retirement: Is This a Good Time to Downsize?
Moving into a smaller home – downsizing – isn't just a way to save creaky knees from the two-story monster where you raised your family. It's also a way to free up equity to use during retirement.
Money Bags
Although Americans lost a substantial amount of home equity during the housing crisis, older Americans fared better than most. In fact, in 2010 the median home equity for those between the ages of 55 and 64 was $100,000, according to Reuters. Americans aged 65 and over did even better; they typically claimed $135,000 in home equity.
This is money they fully intend on tapping into during retirement, and downsizing into a smaller home is one way to access that money.
Attitudes
Only 29 percent of baby boomers between the ages of 50 and 64 plan on moving within the next five years, according to Reuters, and only a fraction of them plan on downsizing.
"Downsizing is scary, and it's a major event in life, like having an empty nest after the children leave," Gerontologist Karen Owen-Lee told the Salt Lake Tribune.
Attitudes change as we age, however. Of the 14 percent of folks over 65 who say they'll move within five years, 67 percent plan to make that move to a smaller home.
Pros and Cons
Like any move, downsizing requires careful consideration, consultation with your financial advisor and a solid plan.
Although often impossible to achieve, perfect timing comes in handy as well. Timing the sale of your current home to coincide with a seller's market, when sales prices are up, helps you hang on to that hard-earned and much-needed equity. Selling in a down market, on the other hand, may result in a loss.
One other disadvantage to selling your current home is all the fees associated with the sale: Real estate commissions, mortgage fees and concessions to buyers can all add up to a significant amount of money. If downsizing into a condo, you'll need to consider HOA fees, while moving to a more expensive community will bring additional costs as well.
Advantages to downsizing in preparation for retirement, or to save more money during retirement, include the obvious: a lower mortgage, and thus lower payments. If you have enough equity in your current home, you may be able to purchase the new home outright, thus eliminating mortgage payments completely.
Utility bills will be lower with less square footage to heat and cool, and a smaller lot may allow the retiree to avoid having to pay a landscape maintenance company. If the new home is in a walkable area, you'll save money on gas and wear and tear on the car.
Make a Plan
One of the most important steps to downsizing is looking for that window of opportunity - a time when the market is robust for sellers yet sales prices aren't so high as to price you out of the market on your new, smaller home.
While waiting for that opportunity, create a plan that includes downsizing to a smaller home, but also consider a less expensive location to get maximum bang for your retirement buck.
Instead of looking at cities or towns with strong job markets (a strong job market tends to increase home prices), look at smaller cities. This doesn't necessarily mean you'll need to move far from friends and family, claims Richard Satran of U.S. News and World Report. "Even overheated housing markets are ringed by pockets where home prices are more affordable," he said.
The median move for folks over the age of 65 is 71 miles from their current home, Satran said, but 25 percent of them end up over 1,000 miles away. A great source for researching cities that might fit your bill is AARP. They list the best cities if you crave sunshine, the most affordable cities, best cities abroad, and even the most quirky cities in which to retire.
Once you narrow down where to live, the rest of the plan is easy. Determine what is most important to you in a neighborhood or community. Walkability? Proximity to recreational facilities? With a list of your wants and needs, a good real estate agent can help you find the ideal home in a community that fits your lifestyle.
Deciding whether to downsize is a personal choice. It requires taking into consideration your current financial position and the lifestyle you hope for in retirement. Seek the counsel of financial and real estate experts before making any firm decisions.
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