Downsizing Is Not a Retirement Plan

Every single day, for the next 17 years, about 10,000 Americans will lean over a cake, make a wish, extinguish candles, and celebrate a 65th birthday.  It is an astonishing number—10,000 people per day entering “retirement”.

Obviously, not everyone retires when they reach 65, but it is probably safe to say that everyone desires the freedom to retire at that age (or sooner).  People choose to save (or not save) for retirement in a variety of ways.  Some rely on social security and a pension.  Some invest in stocks, bonds and/or real estate.  Some invest in private companies.  For the vast majority of Americans, however, their home represents the majority of total net worth.

Therefore, the Boomers (and their McMansions) are in the process of downsizing.  Millions of Americans age 50 and older are attempting to fund a potential retirement of 25+ years by selling their current home and moving to a smaller place.  Granted, there can be numerous financial and non-financial benefits to making such a move, but it is not a panacea.  Some of the positive aspects of downsizing may include:

  • Lower mortgage payment
  • Lower property taxes and insurance
  • Lower utility bills
  • Lower maintenance costs
  • Less worry
  • Less clutter
  • More liquid assets

The estimated average carrying cost of a $500,000  home (no mortgage) in Austin, Texas, is somewhere around $21,000 per year when you include tax, insurance, maintenance, and utilities.  Moving from a $500,000 house to a $300,000 house will certainly save some money, but it is not a significant game-changer, as it relates to one’s future standard of living in retirement.

For example, let’s begin by assuming that we don’t owe any money on our $500,000 home.  This is a big assumption since almost half of all Americans age 60 to 69, are still carrying a mortgage balance.  Let’s also assume that we plan to sell our current home today and pay cash for a new $300,000 home.  After all costs (commission, closing costs, and moving expenses), it is quite likely that we are left with only $160,000 in net proceeds (not even including the potential costs of renovation, furniture, and fixtures).

For all practical purposes, this hardly seems worth the effort.  Moving can be very difficult emotionally, especially if you have lived in the house for a long time.  Even if you are ok with the move, it may be tough to communicate the news to your children and grandchildren.  In our experience, it has been extremely rare to see someone downsize and actually enjoy a significant cost savings from the move.  In most cases, the home is smaller, but the appointments are nicer and the two factors tend to cancel each other out to a great extent.

We are not alone in this discovery.  According to a 2009 study from the Center for Retirement Research at Boston College, the majority of older adults did not realize a significant financial windfall when downsizing their home.  In fact, after including all costs involved in moving to a smaller home, the average “freed-up cash” was only $26,000.  Those that experienced the largest gains moved to a much smaller residence in a neighborhood that provided basic amenities within walking distance (allowing one or both automobiles to be sold).

The message is this–there is no substitute for planning, and the sooner you begin the better.  Don’t make a broad-based assumption that selling your three- or four-bedroom home is going to save your retirement.  For most, downsizing is an emotionally difficult decision.  There is no guarantee that you will be willing and able to do it, or that you will receive a financial windfall from the process.

We are in the business of planning.  Give us a call if you are ready to start realizing the benefits of a personal and professionally-designed wealth management plan.