Suppose that you’re approaching retirement. You’ve raised your family in a three-bedroom home, but the kids have moved out and you don’t need the space anymore. You think the house could sell for $300,000 in today’s market and a small condo, perfect for you and your spouse, could be bought for just $150,000.
You could sell your $300,000 house, buy a smaller condo and invest the difference to supplement your retirement income. A $150,000 certificate of deposit (CD) could earn more than $25,000 in interest over five years at a 3.15% APY — that’s money that could be used to travel and enjoy life in retirement!
Let’s take a closer look at the idea of downsizing, important pros and cons, and some strategies to make the process easier.
Should You Downsize?
Downsizing might seem like a no-brainer for boosting retirement income, but there are many factors to consider before moving and upending your life. If you’ve spent your whole life in the same home or neighborhood, it can be a big adjustment moving to a new house or neighborhood — and the process may not be as easy or profitable as you think.
- You could reduce or eliminate your mortgage, and in turn, reduce your income requirements in retirement.
- You could reduce housing-related expenses in retirement, such as electricity bills or landscaping costs.
- You could move to a location that is more accessible or better suited to your retirement lifestyle.
- You could reduce your cost of living and tax liability if you move from a high-cost area to a lower cost area.
- Moving is an expensive and stressful process during a transition that’s already stressful for many people.
- You could lose neighborhood friends and social connections if you move to an entirely new location.
- You might not make as much as you think when downsizing after subtracting realtor fees, taxes, and other expenses.
- You find it difficult to adjust to a smaller space or new neighborhood and find yourself missing your old life.
Grandchildren can also play an important role in the decision to downsize. For example, you may want to move to be closer to grandchildren that live far away. Others may be hesitant to leave their long-term home because they want their grandchildren to experience the same joys as their children. These are important factors to consider in the decision-making process.
Preparing for Retirement
You should never rely on downsizing to finance your retirement — even if your house has significantly increased in value since you purchased it. While the housing market may be performing well now, it’s impossible to predict how it will perform in the future. A poor market could force you to work longer or settle for less retirement income.
The best way to avoid these problems is to start saving for retirement early by contributing to a workplace 401(k) or individual retirement account (IRA). The sooner you start, the more money you will be able to save. If you’re 50 or older, you can also make additional catch-up contributions of up to $6,000 for your 401(k) or $1,000 for your IRA each year.
If that’s not feasible, you may want to consider looking for ways to cut expenses and/or generate extra income to boost your retirement savings. If you’re already in retirement, you may want to look at ways to cut down on your income requirements during retirement and/or pick up a retirement job for extra income.
There are also some alternatives strategies to generate greater portfolio income during retirement. For example, the Snider Investment Method involves selling covered calls to generate income from a portfolio of stocks. These strategies enable you to capture the higher returns of equities while boosting their income capabilities.
How to Downsize
You should start planning to downsize at least a year before you plan to make a move. In addition to finances, you need to figure out how to pare down your belongings and coordinate the moving process — especially if you’re moving across state or country lines — and handle any unexpected hurdles that arise along the way.
Start by collecting the data that you need to make the decision. For example, you might contact a realtor to see how much your house is really worth, how much a smaller house would really cost after fees and how much you could actually earn from the downsizing transaction after taxes — you might be surprised to learn the truth.
You should also start to research the areas where you plan to move. In particular, you should understand everything from the tax implications of the move to the walkability of the neighborhood. You may even want to stay at a hotel or AirBNB in the area to ensure that you really like it before committing to buy a house.
Next, consult with an accountant and/or financial advisor to better understand the tax effects of the transaction and identify the best place to put the profit from the transaction. You should know exactly what to expect from start-to-finish before making any real estate purchase or sale in order to avoid having to make any last-second, uninformed decisions.
The final step is executing the transactions and making the move. It helps to pare down as much of your unneeded belongings as possible before moving to avoid clutter in your new house or the need to pay for a storage unit. That way, you can start your new life with a clean slate and focus on enjoying life in retirement.
For many retirees, their house will be one of their most significant assets. Unfortunately, it can still be very expensive on a monthly basis even if it’s mortgage free. If you don’t want to leave your home, but need to tap it as a financial resource, retirees can consider a reverse mortgage as a way to increase monthly income or have additional funds to invest.
The Bottom Line
Many people dream of downsizing in retirement to make life easier and increase their retirement savings. While the strategy is great for many people, it’s important to consider the pros and cons before making any decision. You should also take the time to understand the financial implications and how it will impact your retirement.
If you’re looking for a way to boost retirement income, take our free e-course to learn more about the Snider Investment Method and using covered call options to generate an income. You may also want to consider our asset management services for a hands-off approach to generating an income from call options.