With shrinking savings, and retirement incomes failing to keep pace with inflation, older Americans are looking for alternative ways to save money and increase their cash flow. In many cases, they are also looking for ways to simplify their lives. One common strategy for older homeowners is to move into a smaller home.
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A large house is not always practical for retirees. Whether because an “empty nest” left much of the house unused, or because the upkeep has become too cumbersome. It often makes sense to downsize. On paper, selling a home you own and buying or renting something smaller should increase your savings substantially, as well as lower your monthly costs. But it is not always so simple.
True Costs of Downsizing
Consider a hypothetical scenario where a retired couple owns a home mortgage-free that they can sell for $250,000. They want to buy a smaller home, a little closer to care facilities, for $200,000. They hope to add the $50,000 difference to their retirement account. But when they sell their home, the costs for the real estate commissions sucks up 6% of the sale ($15,000). The buyer also negotiates for closing costs of $5,000. Although this couple is not getting a mortgage on their new home, the upfront tax and insurance costs run $3,000. Moving absorbs another $2,000. And some minor improvements to their home, along with new furniture and decorations quickly runs to $10,000. By the time this couple is fully settled in their new home, they have only saved $15,000.
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Their new home is also placed on an updated tax schedule. Depending on the state and county they live in, their old home may have still been on an old schedule because they had owned it so long. So although they now live in a smaller home, their property tax costs may have actually increased!
Every scenario will be different, but this is the reality faced by a lot of downsizing retirees.
Other Options
Moving into a rental, rather than buying a smaller home, will increase the savings you can put away from your sale. This would only be true if you own the home outright or only have a small mortgage to pay off. You will now be paying a monthly rent, however. So this strategy would be good for retirees who want more savings, but don’t mind an increase to their monthly obligations.
Perhaps a better strategy would be to move into a rental without selling your home. Your rental income may actually cover the cost you are paying for rent. If you had a large house, consider having it split into a duplex or triplex to increase its rent potential. If you do not want to worry about the logistics, you can hire a property manager to take care of everything for you. You could even stay in your home and rent out the second floor or back half of the house. This both increases your income, and shrinks the amount of square footage you need to take care of.
Reverse Mortgages
A reverse mortgage is a way to access the equity you have in the home as an income stipend. This kind of mortgage pays you each month, and when you die, the house goes to the bank. For some retirees, this is a great financial strategy. You get to stay in your home even if you would not otherwise have the income to take care of all the bills that go along with home ownership. However, you should consider carefully before taking on a reverse mortgage, and make sure you do it with a lender you trust.
If downsizing is still in your future for logistical reasons, a reverse mortgage would make a future move harder. It also takes away an asset which you might otherwise be able to leave to your heirs.
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