Beating the Downsizing Surprises

The home and home equity are the most neglected and misunderstood factors in retirement planning. Since home equity is one of the largest assets of many people, a lot of money is left on the table.

Surveys indicate that about 40% of baby boomers plan to move sometime after retiring. Many people assume they’ll downsize to a smaller home. The equity extracted from the sale of their old homes and the lower living expenses of the new homes will help fund retirement.

It’s a good plan, but many people don’t execute it well.

Before putting your old home up for sale and searching for a new home, consider whether you’ll really be able to downsize.

In married couples, often one spouse is gung ho for downsizing while the other is tepid at best and quietly going along. Be sure this is really what both spouses want and that one spouse isn’t going along simply to avoid conflict. It’s a long-term decision, and you don’t want one spouse depressed or resentful because of the change

For some people, the old home is a status symbol, a measure of self-worth or accomplishment, or something similar. Even if they don’t say so, they fear downsizing could be seen as an indication that they aren’t as well off as they want people to think.

After considering the emotions, there are other factors to consider.

There’s a lot of work involved in downsizing. Many couples have decades of belongings accumulated in their homes. Winnowing all that down takes a lot of time and physical effort. It also can be a very emotional experience deciding which items to retain and which to part with. Once it’s decided to part with an item, you also have to consider whether to donate it to charity, sell it, throw it away, or try to convince family or friends to take it.

People who’ve streamlined their possessions tell me that you should begin this process at least a couple of years before you plan to move.

Of course, preparing the old home for sale could involve a lot of additional work. The amount of work required depends on how well you’ve maintained the home, the state of your local real estate market and the philosophy of your real estate agent. Most retirees or near-retirees will need contractors to perform all or most of the work, so it will take time and cost money.

Downsizing could affect your social or family life. When the children and grandchildren live in the same area as you, it might not be a problem. When the children live somewhere else, they might visit less often or make shorter visits when your new home isn’t large enough to comfortably accommodate the full family.

Downsizing also could mean you won’t be able to take in an adult child who needs temporary help or a parent who no longer can live alone.

Consider all these factors carefully before deciding to downsize.

Once you’re convinced the lifestyle changes from downsizing are acceptable, carefully run the numbers to see the financial effects of downsizing. People often downsize and find it doesn’t generate the cash flow they expected.

First, consider what you expect to have left over from selling the old house. Consider not just the gross selling price but the net price. You’ll probably have to put some money into the house to prepare it for a sale, and you need to be realistic about the work that needs to be done and what it will cost.

Of course, you need a good idea of what a buyer is likely to pay. Get the opinions of several real estate agents before making estimates. It is best to have a range of probable prices from best case to worst case. Determine the selling price at which downsizing doesn’t make sense, and how likely the house is to fetch more than that price.

Remember there will be selling costs, such as the real estate agent’s commission and other costs. Does your locality have a sales tax or other transfer tax that applies to home sales?

Of course, even after paring your possessions, there’s a cost to moving everything remaining to the new residence. That cost is going to depend on how many things you plan to move and how far you move.

Another cost of downsizing is setting up the new home. People often find that furniture that was fine in the larger home doesn’t work in the new home. Or perhaps the old stuff now seems too old or is the wrong color or style for the new place. In other words, carefully consider how much of your current stuff you’ll be able to take to the new home and how much you’ll have to pay to outfit the new home.

The final piece of the puzzle is the monthly cost of the downsized home. Will you really save a lot on utilities and other regular expenses? Some people find that amenities or services they had in their long-time homes cost extra in their new homes. Or they find the utilities and other ongoing expenses aren’t as low as they anticipated. Some people find they’re traveling to visit the children more or dining out more because the downsized home isn’t suitable for hosting the children or entertaining.

Don’t take any of these details for granted. Develop realistic estimates of your new lifestyle and living expenses.

Sometimes downsizing is essential, because the house is simply too big or too much work at this stage of life. But when downsizing is optional and you’re doing it primarily in expectation of financial benefits, take the time to objectively assess the likely results.