“Downsizing has been a huge part of our business. With my clients, I stress the importance of knowing when to downsize your home,” says Suzanne Rentz, a top 1% ranking realtor in Tulsa, OK. “I work with people all the time who delayed, and their home became too big to manage, with too much maintenance, and the home selling process became much more difficult then it would have been a few years before.”
One of the hottest topics in the Real Estate Market is whether or not it makes sense and is time to downsize your home. According to a recent Merrill Lynch survey of age 50+ retirees, 51% of those who have moved since retiring preferred a smaller home. Nevertheless, many retirees find it difficult to opt in to downsizing. In fact, 64% of retirees plan to remain in their current home throughout retirement.
Source: (Merrill Lynch)
The choice to delay downsizing by even a few years makes a big difference: it could lead to tens of thousands of dollars lost or the inability to move yourself independently due to health or mobility restrictions.
Once you have decided “if” you are going to downsize, “when” you downsize will be your next big decision to make. If any of these 7 signs resonate with you, don’t hesitate – it’s time to get moving!
1. Your monthly housing expenses have risen above 30%
When it comes to how much of your monthly budget should be spent on housing expenses, 30% should be your goal.
This percentage has been used by the U.S. government as the standard for housing affordability since the United States National Housing Act of 1937. Now, any household paying above 30% of their income on housing is considered financially burdened.
Your housing costs may fit within your budget while you are still working, but the simple act of retiring can unexpectedly push some retirees into the “burdened” bracket.
Housing cost burdens increase with age as expenses continue to rise and income is reduced in retirement. The following map shows that there are numerous areas where retirees are spending 30%-40+% of their monthly budget on housing.
Source: (jchs.harvard.edu)
“Those who are just getting by because they haven’t figured out how to live on a fixed income, that’s a sign to downsize into a smaller place with a more reasonable monthly mortgage payment,” advises Swanson. “Seniors who want to avoid getting a part-time job at say, a fast food restaurant, just to make ends meet need to calculate how much house they can afford in retirement.”
The Merrill Lynch survey also found that 64% of retirees downsize and make the transition to a smaller home to cut down on their housing expenses.
Source: (Merrill Lynch)
While downsizing will save you money in the long term, you do need to be prepared for the upfront expenses that come with moving.
“Living in a smaller space can reduce the mortgage payment, and cost less for utilities, property taxes and maintenance—but downsizing can come with substantial upfront costs,” advises Tim Kennedy, a mortgage loan originator and reverse mortgage specialist with US Mortgage Corp.
“There are repairs on getting your home ready to sell, moving expenses, closing costs, and potential upgrades on the new home—in the short term, those expenses can seem quite daunting, but in the long term downsizing can reduce monthly debt and increase monthly cash flow.”
These expenses may make downsizing while you’re still working the wisest move, so you’ll still have a salary rolling in to help offset the costs.
2. Your current monthly budget leaves little leftover cash for saving…or fun
How do you plan to spend your days once you retire? Maybe you would like to travel or perhaps head back to school to pursue a passion like painting or writing. Whatever you choose to do after you retire will most likely cost money. If you are currently spending too much on housing expenses to afford your dreams and desires while you are still working, you will most likely have even less cash to spare when you retire.
Source: (betterpicf.pw)
However, if you downsize 5 or 10 years before you are set to retire, you will save several thousand dollars each year—which adds up over time.
Source: (crr.bc.edu)
As the above example demonstrates, by moving into a home that costs $100,000 less than your existing home, you’d earn $3,000 in income from the proceeds and save $3,250 in housing costs annually.
In five years, your household will have an additional $31,250, and in ten years that doubles to $62,500 extra in savings by the time you’re ready to retire. That will help you invest in your dreams while still having plenty left to keep earning interest income for you.
3. You’re falling behind on your home maintenance
The precious memories of a home often lead retirees to linger longer in their family home than is wise for their health and their financial stability. If sentiment tempts you to hang on to your home too long, it’ll wind up doing more damage to your finances than you’d expect.
“There are negative consequences to not downsizing,” says Swanson. “If you make the move too late, your home just starts deteriorating. Then you’re going to have to spend equity to repair your house before it goes on the market. You don’t know how much that delayed maintenance is going to cost you if you wait too long to replace the roof or air conditioner.”
Not only will you wind up spending more money getting your home ready to sell, you’ll have wasted years of cash on more expensive homeowners’ insurance, property taxes and more. And when you actually do end up selling, you may not have the same level of energy or capability for a smooth transistion. Selling a house takes a lot of work, and some retirees find that as time goes on they are no longer up to the task, and lose equity in their home because of it.
4. Your home has features that no longer fit your lifestyle
Back in the day when your kids were building blanket forts in all the bedrooms, the bathrooms had waiting lines, and your teens were tussling over the remote in the TV room, there were times when even your spacious home felt too small to contain the chaos. These days though, most of those bedrooms are now rarely-opened storage.
Now that you’re only using a handful of rooms in your house, it hardly makes sense to pay for heating, cooling and lighting rooms that you aren’t using.
Size is only one part of the no-longer-livable features that your home might have. Other factors in your home such as architectural features that may pose a mobility problem in retirement can also lead you to move to a smaller home.
Source: (health.harvard.edu)
Your home may have features that will take a physical toll as you grow older, like stairs, a steep driveway, or high-maintenance landscaping. Seasonal maintenance like shoveling snow or mowing the lawn can also become more difficult with each passing year.
A survey conducted by Demand Institute found that aging-friendly accessibility was a key factor among baby boomers looking to move, with single-story, low maintenance and disability accessibility topping the list of most desired features.
Source: (demandinstitute.org)
If accessibility tops your list of must-haves in your smaller home, you need to start house hunting long before you’re ready to retire. Since studies show that there is a shortage of accessible housing. As of 2011, only 3.5% of housing in the US had single-floor living, no-step entry, and wheelchair accessible extra-wide hallways and doors.
Source: (Kelly Sikkema/ Unsplash)
5. You’re the oldest resident in your neighborhood
“Family neighborhoods tend to stay younger as families keep moving in, so seniors end isolated by aging in place in that neighborhood,” warns Swanson.
Your current neighborhood most likely was a good fit when you first purchased your home. It was perfect for starting or raising a family and was ideal for your kids. But now that your original neighbors have moved or passed away, it may feel lonely. Studies show that depression is a growing mental health issue for retirees due to the fact that loneliness affects 25%-60% of older Americans.
Downsizing to a retirement community means living among your peers—especially if there is an active homeowners association (HOA).
“When you downsize into a retirement community, you can actually raise your happiness by meeting more people from your generation,” notes Swanson. “A lot of the adult communities have amenities like tennis courts, billiards rooms, woodworking shops, classes that teach you how to knit, clubs that play cards and board games that your homeowner’s association pays for. That can end up saving you money in the long run.”
Association-provided activities are often more cost effective than finding entertainment elsewhere. The socializing they provide may help by preventing depression-related health problems and improving quality of life.
Of course, communities that charge HOA fees add to your monthly housing expenses above and beyond the mortgage payment you are already paying, but often those houses are discounted on the front end to help account for that difference.
6. You want to convert your home equity into income
Are you confident that you’ve saved enough to fund the retirement lifestyle you desire?
A 2018 Retirement Confidence Survey by the Employee Benefit Research Institute found that only 1 in 3 retirees are “very confident” that they have enough money to live comfortably throughout their retirement.
Source: (ebri.org)
If you are not confident, you may be counting on your current home equity for retirement income. In fact, covering everyday expenses is the number one reason retirees give for wanting to tap into their equity according to the Urban Institute’s Seniors’ Access to Home Equity report.
Source: (urban.org)
The reason why is simple- it’s because for most homeowners, that equity is their most valuable asset. Unfortunately, that asset is expensive to maintain.
Source: (crr.bc.edu)
Therefore, by accessing that income to pay your everyday expenses like housing costs, it’ll eventually become depleted—unless you’ve invested that equity in a low-risk retirement account that pays out monthly dividends.
“Downsizing your home is one of those things you can do to enhance your lifestyle during retirement. It’s all about converting the home equity into a stream of income that will last the remainder of your life,” says Kennedy.
“For example, let’s say you pay $4,200 a month on your mortgage, principal interest, taxes and insurance. If you sell and downsize 10 to 15 years before you retire, that’s $40,000 a year in housing costs that you could put towards your retirement instead.”
Source: (safetynet.com)
This investment strategy only works if downsizing saves you money in the long run. It will be important for you to work with a top agent who has experience helping retirees downsize and will properly help you manage your most valuable asset.
A great agent can help you sell your current home for the most money possible. They will also make sure your new home is both affordable in monthly housing costs and inexpensive enough to leave you with a sizable amount of equity to invest in retirement, while the transition is as smooth and seamless as possible.
7. Your career no longer ties you to your location
Finding that ideal downsized home that’s both affordable and accessible may seem out of reach—especially if you are attempting to buy in your existing neighborhood.
But one of the benefits of retirement is that you no longer need to let your career dictate where you live.
Source: (Merrill Lynch)
The Merrill Lynch survey found that age 61 was the sweet spot for retirees when they were able to take their pick of where to live—and this freedom can be a big help financially.
Without a workplace to worry about, you’re free to shop around for the states, cities and neighborhoods with the lowest property taxes, utilities, sales taxes and more. Your square footage (if you choose to keep the same sqft) may not have to be sacrificed if you choose to move to a less expensive area.
While 51% the retirement-aged home buyers surveyed by Merrill Lynch did downsize, 19% purchased the same-sized home and 30% purchased a larger home after retiring. This proves that it is also possible to upsize your home while still downsizing your actual monthly housing expenses, stairs, or troublesome yard.
Choosing to downsize is a difficult decision to make and choosing when to downsize can be even more difficult. But if you plan accordingly, your move into a less-expensive home has the potential to save you money, and make you money, too.
As one of Tulsa’s foremost real estate experts, we would be happy to help you determine what your home is worth and show you options for cutting costs. A true pro knows what it takes to get top dollar for your current home and negotiate the best deal on a new one, while making the transition as seamless as possible. Whatever your situation may be, we’d love to partner with you to help you make an educated decision investing into your future.
Suzanne Rentz