It started when your neighbors bought that cute little condo in Florida. Now virtually every retiree you know has moved to a smaller, more affordable place. Could you be next? Downsizing is an easy way to save money in retirement, but it’s certainly not the only way. If you’re concerned about covering your expenses in retirement, here’s how to assess whether it’s time to consider downsizing.
The Benefits of Downsizing
For most homeowners, the home isn’t just the biggest investment, but also the largest expense. Even if your home is paid in full, you’ll be stuck covering repairs for the rest of your life. This can prove tricky when you’re living on a fixed income. Renting, which removes this expense, or buying a smaller place can both save you plenty of cash. You may also find that you simply do not need all of the space your home offers you, and that keeping your home clean, beautiful, and up-to-date becomes easier when there’s less home to worry about.
Does it Have to be Your House?
If you’re thinking about downsizing but torn about the notion of giving up your home, consider this: selling your house is only the most popular option, not necessarily your only option. You can significantly reduce expenses by:
- Becoming a one-car family, or even giving up your car in favor of public transit and/or Uber.
- Selling or renting out vacation property.
- Renting out a room in your home, particularly if the area is segregated from the rest of the house.
- Cutting back on travel expenses.
- Eating more home-cooked meals. Eating out can quickly add up, costing hundreds of extra dollars each month.
Drawbacks to Downsizing
If you’re like most retirees, your home is your largest and most valuable investment. You should not give that investment up lightly, particularly if you think you might need your home’s equity as a source of cash. One of the biggest benefits to home ownership in retirement is the option to pursue a reverse mortgage. If you’re over 62 and own your own home, a reverse mortgage offers you tax-free money that you can use to fund your retirement, spruce up your home, or for any other purpose of your choosing. As long as you remain in your home, you do not have to repay the money. If you sell your home without pursuing this option, you may rob yourself of one of your most lucrative—and accessible—financial options.
Making the Decision
There’s no magic formula that can tell you whether and when to downsize. Ultimately, you’ll have to take into account not only financial issues, but emotional ones. Try weighing the following:
- The emotional and financial value your home offers you. Is it a family gathering place, or just a big, unused space?
- How much you might be able to get from selling your home, versus how much you could save by refinancing or taking out a reverse mortgage.
- Your options for purchasing or renting a less expensive home.
- The relative value of sprucing up your home, versus renovating to sell.
- The extent to which downsizing other expenses could help you save money.