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FUNCTIONALITY –If you plan to sell your current home and move to a smaller one after retirement, you may be in for a shock.
While it’s tempting to see “downsizing” as an easy way to cut costs in retirement, the new economic reality can make it much more difficult to realize those savings. Home values ââhave risen nearly 9% in the past year, making the effects of downsizing much less dramatic. In 2020, for example, homeowners aged 65 to 75 who downsized an average home worth $ 340,000 often ended up buying a smaller home costing around $ 250,000.
These small savings reflect both the tight housing stock and the fierce competition for small “starter” homes. With the current median price of homes in the United States at over $ 312.00, reducing costs and square footage may not be easy to achieve. Retirees looking to downsize will find themselves competing with first-time homebuyers looking for smaller, cheaper homes.
Plus, mortgage rates slowly rise, making buying a new home much more expensive.
Does downsizing make more sense?
While moving to a smaller home seems like a logical decision for many retirees and pre-retirees, you need to do the math first. It is advisable to include your financial advisor or team of advisors when considering downsizing to make sure it makes sense in the long run.
- Calculate and recalculate. Add in all brokerage fees, property tax increases, HOA dues and other costs. If you are withdrawing money from a savings or retirement fund to cover the move, consider the long-term impact of those withdrawals on your retirement income.
- Remember that there are many additional expenses associated with buying a home. If the last time you bought a home in a while, you may be neglecting to factor in closing costs, realtor fees, furnishings and improvements, moving costs, and repairs. .
- Consider the long-term implications if you withdraw a lump sum from your retirement accounts to finance your home. Also, don’t forget to include taxes. An early distribution could also push you into a higher tax bracket, reducing your savings.
- Is your new home in a place you want to be? You will likely only be downsizing once in your life, so choosing a place where you would be able to spend the rest of your life is essential.
- Have you thought about what you will need in a home as you age? Your retirement home should be able to adapt to the physical changes that often occur with age. Your replacement home may need to include railings, stairlifts, walk-in tubs, and other accessories designed to keep you or a loved one independent and mobile. A house that is too small may not have space to meet special needs.
- If you are moving to a senior citizen community, what additional costs will you have to incur? Will the HOA rules allow you to have a home sitter if the need arises? Is the community located near public transportation or will you have to drive more than usual?
- What are the costs of the landscape? Can you keep up with landscaping maintenance or will you need to hire someone to help you?
- Is your portfolio balanced to include secure monetary products, such as annuities and life insurance? These products can help you create predictable income to cover household expenses.
In the past, downsizing was an effective way for retirees to significantly reduce their monthly expenses while maintaining their independence. However, we currently have an unpredictable real estate market, made worse by lack of inventory and speculation, as well as inflation and near zero interest rates. The savings resulting from downsizing are therefore not as dramatic as they were in previous years. Retirees should consider the long-term effects before deciding to leave their current home.
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