What to Consider When Downsizing



Downsizing home

There was a time in your life where you were driving around with your spouse looking at different homes and painting a picture of what your home would look like. The day came when you were approved for a mortgage so you contacted your realtor and started to seriously shop. You suddenly find yourselves disagreeing on the tile but agreeing on the back splash of your kitchen. And sometimes, you went over budget somewhere and had to compromise on cutting back somewhere else.

Fast forward some years down the road and you have some great memories of the kids growing up in your home. The birthday parties, Christmas mornings, Easter egg hunts, and the endless bar b ques with all the wanted and unwanted family members that lead up to this question.

Are we staying or are we downsizing home?

As simple and obvious as it may seem to some, this question can become a bit more complicated to others. The decision to downsize homes can have major financial and emotional impacts on individuals and delaying a decision can effect how you live your lives in the future.

Some things to consider are:

  • Do we still need this house?

  • Do we still have a mortgage balance?

  • Who will inherit our house?

Do we still need this house?

Typically, the answer to this question is “no.” After all, you and your spouse are empty nesters and why live in such a big home? The yard needs to be maintained, the house is at least a decade old, things need to be fixed, and property taxes are high because you chose to be in a great location with a great school district. The easiest rebuttal to this argument is Grandkids. Much like when you had your children, everything changes when you have grandbabies. You want to spoil them, babysit them, watch them give your kids the same hell they gave you and not have to be the disciplinarian like you had to be. This single argument can make things confusing for both you and your spouse.

Consider: While the need for a big house may not be there anymore, sometimes the best financial decisions cannot be measured by money. Will your home be "the place" for holidays, birthdays, and special events? If so, you may be better off staying.

If not, you may have to consider if your grand kids are around the corner or if you have to travel to see them. Selling your home and downsizing may be a solution to give you the funds to travel and visit the children that are no longer just around the corner.

Do we still have a mortgage balance?

Ideally, if you are an empty nester, you are a few years away from paying off your home or may have already paid it off. But sometimes life throws us a curveball. You may have taken out some equity for the kid’s college, some remodeling, or even something like a vacation because the family needed it. Whatever the case may be, having a mortgage at the time of retirement can definitely put stress on other goals such as travel, starting a new business, or other goals that may require financial commitment. Retirees that go into retirement with less debt have a higher probability of achieving their financial goals.

Consider: If you still have a mortgage on your home, consider the net profit after selling and paying commissions to your realtor. How much is left to downsize? Is that enough to buy a home that suits your needs and accomplish the things you want to accomplish? Making a list of things you want to do during retirement can help clear up some cost-related questions.

However, if you find solace in being in your home and have made hobbies out of gardening, remodeling, and doing things locally, then having a mortgage could have little bearing on your decision. At this point, if you decide to stay put, you may have to consider if you will be able to keep up with the mortgage payments after retirement. Make a list of the different avenues of income you will eventually receive during retirement and see if that is enough to keep up with your mortgage.

Who will inherit our house?

Many homeowners are attached to their homes, understandably so since they put blood, sweat and tears into making it just that, "a home." Few think about, "what will happen to our house when we pass away?" Will you leave it to your kids or will it be claimed from your estate to payback any help you received from government care programs in your final days? Sometimes we want to leave our children with a memory of their upbringing that parents stay in their home just to pass it on, but few think about their children having their own home and making their own memories.

Consider: Consider the condition of your home and location before leaving your children with a legacy item like a home. It may bring more burden than bear fruit if it is not ideal for you children to inherit. Also, if an adult child has moved in with you to help take care of your household, it may be a nice gesture to leave them a home if they forgo purchasing their own.

On the other hand, eventually we all need some sort of long-term care and if you do not have insurance for such events, you may qualify for government programs that will assist you in our final days. This costs a lot of money and normally gives these programs claim to your home after your and your spouse's passing. Could selling your home and using the proceeds prior to be the answer? Or perhaps having a gifting strategy in place prior to entering a care facility could work.

The Bottom Line:

The bottom line is whatever decision you and your spouse decide to make, it has a financial impact on how you will live your lives in the future. Go in with a plan, understand what it entails, and adjust for any changes.

 

MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.


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