A lot of Baby Boomers find that the majority of their assets comes in the form of equity in their home. In conversations with me, they say something to the effect of:
“Dave, a big part of our retirement plan is to downsize our house.”
Let’s think about that idea for a second.
- You own a single family house in the area.
- You enjoy living there. You’ve made it your home.
- You decide to downsize in order to fund your retirement and lower your budget.
Ok. So now let’s think about your options. Where are you going to move?
- A smaller, crappier single family home.
- A townhouse
- A condo
- A manufactured home
That’s not to say there aren’t situations where downsizing makes sense. There are. Keep reading and we’ll get there.
But first, let’s assume your house has been your haven for most of your adult life. You love it, but you’re considering downsizing to have more money for retirement.
The downsizing savings myth
For example, let’s say you own a $250,000 single family home with no mortgage.
You decide to move into a townhouse. A decent townhouse will cost you $150,000 at an absolute minimum. Don’t forget about the HOA fees. That could be hundreds a month. And don’t forget about moving costs, paying the realtor a commission, redecorating…..
You now own a $150,000 townhouse which you don’t like as much as your last home, paying a few hundred a month in HOA fees. You find yourself almost exactly where you started. Sure you have $80,000 in the bank (after fees, commissions, closing costs, etc). That $80,000 can produce about $300 a month in dividends and interest. Maybe you are saving a couple hundred dollars a month.
Is it really worth it?
Another example: Let’s say your own a $250,000 single family home with a $100,000 mortgage. You are paying $1300/mo on the mortgage which you’ve had for well over ten years.
You decide to move into a condo. You sell the house, pocket the $135,000 (after commissions) and find the condo of your dreams. Actually, that’s not entirely true. A $135,000 condo is not going to be as nice as the house you just sold.
Now comes the HOA fees. Condos are notorious for high fees, which can change at the drop of a hat. Also, don’t forget, you may get a letter from the condo board that says: “We decided to replace the roof and we’re going to charge you an assessment of $8,000.”
But now you have no mortgage! That saves you $1,300 a month in mortgage payments (minus the HOA of $300). So you now live in a condo that you don’t like as much as your house which needs a ton of work and you have an extra $1,000/mo.
Is it really worth it?
Maybe. It depends on your overall financial situation. Could that $1,000 be saved somewhere else? There are other ways to trim a budget which are much less painful. Remember too that your mortgage will be paid off at your original home if you can stick it out for a few more years.
Another example: Let’s say you own a $200,000 home with no mortgage. You decide to sell your house and move into a manufactured home.
A relatively nice manufactured home will cost you between $50,000 and $100,000. You retain $180,000 after commissions and moving expenses. You put $100,000 toward the home. The manufactured home is on a piece of land that is leased back to you. Lot rents vary but let’s say it is $500 per month.
You now have a new $500 monthly payment but you still have $80,000 in the bank, which will produce around $350 per month in interest and dividends. This seems like another situation where the savings is pretty minimal and you are living in a house you don’t like as much.
Of course there are always caveats to these conversations.
When does it make sense to downsize?
Here are some examples where it might make sense to downsize.
Your current home is too big.
The kids moved out and you are left with a 3000-square-foot home with a big yard. Downsizing in this situation often makes sense. While you might not save a ton of money, maintenance free smaller town homes can be very attractive.
You plan on a major downsizing.
Moving from a $400,000 home to a $100,000 manufactured home will create a significant difference in budget and spending needs going forward. Few people like this option.
You have the opportunity to move in with a family member.
This can be especially attractive if your child or relative has an apartment attached to their home, or a mother-in-law suite. This is a fantastic way to lower expenses and increase cash in the bank (not to mention bringing a family together).
You have no other retirement assets.
This is not ideal, and NOT the situation for most retirees. But, for those folks facing this reality, selling their home and downsizing to a much smaller space can help them live comfortably throughout their retirement.
So before you think that downsizing could fix all your retirement worries, really consider the long term financial ramifications. Do the math. Consider the emotional consequences of moving. And move ahead with caution.