Family Update
I hope everyone had a Merry Christmas! We had a lovely Christmas morning with the kids, but now that they're all teenagers, it seems like they no longer believe in Santa. The magic of the holiday feels a bit diminished, but at least we got to enjoy some extra sleep!
Chris got an electric drum set that makes no sound when playing with headphones—a technological marvel. Jesse and Alex got new Xboxes, which in their world is the best possible gift.
As I've mentioned in the past, Jesse (second from the left below) is really into bodybuilding. He got a barbell and some weights. We spent last night in the living room showing off our feats of strength. I was the only one that could do a pull-up, but they laughed at me because I couldn't pick the bar up since my back is stiff.
Grammy and Pop are flying down from Pittsburgh tomorrow, which will be a nice break from the cold. They have plans to ride bikes and take leisurely strolls through my orchid paradise.
Many Baby Boomers find that most of their assets are equity in their homes. In conversations with me, they say, "Dave, a big part of our retirement plan is to downsize our house. It will give us a big financial boost to help us out."
Let’s think about that idea for a second.
Let’s assume:
•You own a single-family house in the area.
•You enjoy living there. You’ve made it your home.
•You decide to downsize 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 (not-as-nice) 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 sanctuary for most of your adult life. You love it, but you’re considering downsizing for more retirement money.
Downsizing for savings is often a daydream, not a reality.
For example, let’s say you own a $600,000 single-family home with no mortgage.
You decide to move into a townhouse. A halfway decent townhouse will cost you $400,000 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, or making minor repairs ….
You now own a $400,000 townhouse (which you may not like as much as your last home).
You currently have $120,000 in the bank after accounting for all fees, commissions, closing costs, and other expenses. This amount generates approximately $500 each month in dividends and interest. However, overall, you find yourself in a similar financial position as before.
Although you may save a few hundred dollars each month, be aware that HOA fees and rising property taxes could offset these savings. Additionally, keep in mind that property tax rates will reset based on the new purchase price. Given the significant increase in property values, you might end up paying much more than the previous tenants did.
Is it really worth it?
Another example: Let’s say you own a $600,000 single-family home with a $200,000 mortgage. You are paying $1,300/mo on the mortgage that you’ve had for well over ten years.
You decide to move into a condo. You sell the house, pocket the $350,000 (after commissions) and find the condo of your dreams.
Actually, that’s not entirely true. Barring some real estate miracle, a $350,000 condo will not be as nice as the house you just sold.
When it comes to HOA fees, condos often come with high costs that can change unexpectedly. Homeowners may receive notifications from the condo board announcing sudden assessments, such as, "We’re replacing the roof, and you’ll owe an additional $20,000." This situation occurs more frequently than many people think, and these unexpected fees are creating significant challenges for condo owners trying to sell their properties.
But now you have no mortgage! That saves you $1,300 monthly in mortgage payments. So, you currently live in a condo you don’t like as much as your house, which needs a ton of work. You have a new $600/mo HOA payment, and your property taxes have doubled.
Is it really worth it?
Side Note: With mortgage rates at a very high level, selling one house with a mortgage and buying a new house with a new mortgage doesn't make any financial sense. You're going from 3% to 7%, which will almost double your payment.
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, leaving you with a 3,000-square-foot home with a big yard. Downsizing in this situation often makes sense. While you might not save much money, maintenance-free smaller townhomes can be very attractive.
You plan on a significant downsizing. Moving from a $600,000 home to a $200,000 manufactured home will significantly change budget and spending needs in the future. But most people aren't thrilled at this idea.
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 your family together).
You have no other retirement assets. This is not ideal, and not the situation for a majority of retirees. But, for those folks facing this reality, selling their home and downsizing to a much smaller space can help them live more comfortably throughout their retirement.
So, before you think downsizing could fix all your retirement worries, consider the long-term financial ramifications. Do the math. Consider the emotional consequences of moving. And move ahead with caution.
Be Blessed,
Dave