There are differences of opinions when it comes to housing during your retirement years. Some people plan to downsize, others to upsize into the dream house they could never afford earlier in life. Some want to move to an entirely new location, while others specifically make their retirement provisions with the assumption that they will maintain their current home at all costs.
Rather than taking up the pros and cons of each individual housing decision, I’m going to advocate in favor of downsizing your home for retirement, since it is an option that has so many benefits.
Some of those benefits include:
There’s No Point Paying For Space You’re Unlikely to Need
If you’re planning to stay in the home that you raised your children in, you will probably be paying for space that you are unlikely to need. For example, if it’s just you and your spouse, you probably don’t need four bedrooms and three bathrooms.
Even if you plan to pay off your mortgage completely before you retire, you’ll still be paying property taxes, homeowners insurance, utilities, and property maintenance, all of which will be higher on a larger home.
In the best of all worlds, the home that you will live in during retirement will be no more and no less than what you need to enjoy a comfortable life. Anything in excess of that will simply be a cost that you don’t need to bear.
Cutting Basic Expenses is Equivalent to Creating Retirement Income
So much of retirement planning today is centered on acquiring a large enough portfolio to be able to support yourself in a lifestyle similar to the one that you’re living right now. Even if you’re living a comfortable, mostly middle-class standard of living, that can require a seven-figure investment portfolio. And even under optimistic circumstances, it’s a lot of money for a person on a middle class income to save.
The often overlooked “B side” of retirement planning is expense reduction. This should get equal attention with building your retirement portfolio. After all, there’s a direct relationship between the cost of living and investment savings: The less money that you need to live on, the less retirement savings you need to have.
Nowhere is this more important than when it comes to your housing expense. That’s because housing is a controlling expense – the higher your housing costs are, the higher your expenses are likely to be across the board.
For example, your overall cost of living is likely to be much higher if you are living in a $500,000 house than one worth $250,000. Even beyond property taxes, insurance, utilities, and maintenance, the amount and type of furniture that you put into the home, and even the car that you drive, are likely to be influenced by the value of the home. The lower the value of the home, the lower your overall living expenses will be.
Your Home Could be a Major Source of Retirement Capital
If you plan to have your mortgage paid off by the time you retire – and you absolutely should – your current home can be a major source of retirement capital. While many people would like to live in the home they own mortgage-free, it’s not always a good idea to have too much capital tied up in the house. This is especially true if your retirement portfolio will not be as large as you need it to be by the time you reach retirement.
As an example, let’s say that your home is worth $500,000 and that you plan to have the mortgage paid off by the time you retire. If you sell the home, you can invest $250,000 in a smaller space, then add the remaining $250,000 to your retirement savings. If your retirement portfolio is not particularly large, $250,000 in extra capital could be the difference between semi-retirement and full retirement. That’s a game changer!
If You Plan to Travel in Retirement You Won’t Need As Much House
One of the most common retirement dreams is being able to travel. And if you plan to travel and to be away from home much of the time, you’ll have even less need for a large home. It once again gets back to paying for space that you’re unlikely to need.
But even more specifically, the excess size and cost of the home could compete directly with your travel plans. The more money that will be needed to maintain the home, the less than you will have available for travel.
Smaller Living Space = Lower Maintenance
Another of the aspects of retirement that people most look forward to is having more time on their hands. When you’re working and raising a family, there’s just never enough time. Retirement will free you of those responsibilities. The question then becomes, how do you want to spend your time in retirement?
Do you want to spend that time cutting a large lawn, trimming hedges, shoveling snow, cleaning gutters, and painting and repairing continuously? By moving to a smaller home – especially if it’s a condominium or apartment – you will be spared most of those responsibilities. This will provide you with even more time to do the things that you really want to do.
There’s also a financial component to home maintenance. You will probably reach a point in life where you will physically no longer be able to maintain your property; when that day comes, you’ll need to pay others to take care of the property for you. That will increase your cost of living, which will cut into your retirement income.
By downsizing your home just before you retire, you will avoid all those problems, and leave yourself more time and money for everything else that you always wanted to do when you retire.