Read This Before Downsizing Your Home for Retirement
While everyone has different reasons for downsizing their home later in life, many assume that doing so will help finance a good chunk of their retirement. Unfortunately, the reality is that homeowners often reap less than what they had originally anticipated in considering this plan. Consequently, some retirees are forced to make drastic changes to the retirement lifestyle they had envisioned.
If you plan on downsizing before or during retirement, consider taking the following steps to ensure your expectations are more closely aligned with reality.
Properly assess the value of your current home
You can take several approaches to determine your home’s value. For example, an online estimator can give you results in mere minutes; however, the corresponding accuracy isn’t the best. For example, Zillow admits to an almost-8% median error rate for off-market homes, which can over or underestimate the value of your home. Therefore, it’s safe to assume—especially in areas outside of large cities where the turnover rate is lower—that the margin of error is pretty significant for these tools.
Thankfully, local real estate agents can provide you with a more accurate appraisal because they consider the assessed value, comparative sales, and any home features and upgrades an online algorithm cannot. You can also ask your realtor for strategies to maximize the value of your home. Nevertheless, an even better option is to hire a professional appraiser. Although this will cost you a few hundred dollars, he or she will make sure to consider each and every property feature that impacts value.
Understand all costs associated with a home sale
After you obtain a realistic home value estimate, you’ll need to assess costs attached to selling your home: including closing costs and taxes.
Following the home inspection, a buyer can request modifications or repairs. Thus, with the exception of cosmetic changes or upgrades, the seller may be on the hook for items such as pest damage or electrical, plumbing, roof, or foundation issues.
Closing costs—which, according to bankrate.com, can range anywhere from 2% to 7% of the home’s sale price—can include payment for the mortgage balance, property transfer taxes, recording fees, and attorney costs. You’ll also need to pay any real estate commissions at closing, ringing in at up to 6% of the home’s sale price.
It’s also important to understand tax implications, knowing that Uncle Sam allows most couples to exclude up to $500,000 in gains from their taxable income (depending on how long they’ve lived in the home).
Sell before you buy
Depending on your situation, it may make sense to sell your current home before you downsize. Doing so will help avoid the temptation to settle for less than you would otherwise fetch since there is no financial pressure to fund the closing of your new home. Otherwise, if you don’t have enough saved, you may require a bridge loan (a short-term loan, usually for a few weeks) to close on the new home. These are sometimes difficult to obtain and are often very expensive.
Downsize your belongings
This is often an emotional process and, depending on how many sentimental items you own, is sometimes quite overwhelming. Therefore, it’s best to start early and not rush. Begin with smaller items and then move on to furniture in rooms your new home lacks: such as a third bedroom or office.
Downsizing your belongings will also help minimize moving costs. Based on a two-to-three-bedroom move, Moving.com claims the average local move costs around $1,250 while that of a long-distance move (of at least 1,000 miles) is just under $5,000. As you can see, moving isn’t inexpensive, and corresponding costs must factor into your calculations.
Know that house expenses won’t disappear in retirement
Just because you’re moving into a different home doesn’t mean you’ll avoid repairs and/or renovations. For example, it’s important to remember that most houses aren’t designed with old age in mind. Therefore, if you require wheelchair accessibility or need to expand a bathroom or convert existing space so all key areas are on one level, related expenses can quickly pile up. Even a brand-new home isn’t immune to accidents and weather damage that homeowner’s insurance may not cover.
In sum: downsizing to help fund retirement
If you’re considering downsizing in the near future—especially to fund a chunk of your retirement—it’s imperative to avoid potential pitfalls that may cause you to reap less profit than what you had anticipated. A great place to start? Reading the tips in this post!
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
