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Retirement Debate: To Downsize or Not?

Retirement Debate: To Downsize or Not?

When planning for retirement, sooner or later “downsizing” comes up in the conversation.

You downsize your home, your car, your lifestyle – be it eating out less, shopping less, traveling less. Less becomes best.

For many people, downsizing is a prudent strategy if they do not have enough money set aside to meet their current standard of living or the economy forces them to take retirement earlier than they had planned because of job loss. The strategy to downsize usually comes from a need, not a want, says Marlene Dattilo, a certified financial planner with Financial Architects. In a 2011, MassMutual Retirement Services study, 54 percent of those polled said they would have to reduce their standard of living and 64 percent said they expected to work at least part-time in retirement.

Downsizing has plenty of advantages. It enables retirees to access wealth which is stored in their home. As a general rule, wealth stored as home equity is not otherwise accessible for use in retirement income planning. The exception to this is home equity loans or reverse mortgages, but both involve the need to pay interest charges to the lender which can become quite costly over time, says John Hauserman, author of RetirementQuest: Make Better Decisions.

Quite simply, “Downsizing can help ensure that you don't run out of money. It is a means to a goal,” says Steven Levine, a senior member of Levine, Jacobs & Company, certified public accountants.

There are also advantages that have nothing to do with money. “People sometimes overlook that when they downsize they wind up in a community of like-minded retirees, more than willing to watch your home or apartment while you travel or perhaps become traveling companions for a world of adventure waiting for you out there,” says Kym Anderson, a CPA with Jones & Company, certified public accountants.

Anticipate the reality of less

But for all the upside of downsizing, there is a downside.

“Change is as much a disadvantage as an advantage. Moving is always stressful, but even more so in retirement. It seems to be an end to an era, giving up familiar surroundings, neighborhoods and friends,” says Anderson. Deciding what can and should be moved can be very painful. Downsizing means less room for all the treasures you've collected over a lifetime.

For sure, downsizing is an emotional issue. “You want to visit your grandchildren. You want to be able to give them some of things you couldn't give your own children when they were growing up. Having to spend less is often a challenge in the face of these things,” says Dattilo.

New retirees are often already experiencing dramatic life changes just from leaving work. Adding additional stresses like moving, especially if away from family and friends, may not be a good idea and can lead to depression, points out Hauserman.

Make your decision carefully

The decision to downsize should not be made lightly. Sure, if you sell your home it can translate into immediate savings in monthly mortgage payment, upkeep and utilities. If your home is paid off, you will be able to invest the difference between the sales price and the cost of your new home. Generally, too, any gain from the sale is tax free, says Anderson. But, explore all options. Maybe you can work longer, or work part-time in retirement to avoid making drastic changes.

Have a good idea of your income and expenses. Know what's coming in for sure – like social security, pension, and annuity payments, for example, and what's going out, mortgage or rent, utilities, food, and what can be changed or cut, explains JP McDermott, a financial advisor with MassMutual.

If you are considering selling your home, be sure you know how much time it could take to sell and what the out-of-pocket costs to prepare the home for sale will likely be. Where will you move to? Will you rent or buy? What is your price range?

“Start planning on what you'd like to end up with and then work backwards from that dream to make it happen,” says McDermott.

Don't go it alone. Talk to an advisor to get help planning your exit from the workplace and to help design your distribution strategies to maximize your income in retirement, so that you don't outlive your savings, and maybe even avoid downsizing.

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Paoli2   |     |   Comment #1
"To Downsize or Not"   Ok if these articles are going to keep popping up, I will have to keep saying the same thing.  "Like We Have a Choice?"   I usually enjoy these articles but anything that states one even might have a choice about what is going to happen to them in retirement sets off my aggravation mechanism.  Kind of like when I read people should work until they are 70 or even older.  "Where" are these great jobs where companies are giving workers a choice of when they want to retire?  In the real world, the truth is that once your pay scale reaches a higher level or you get close to your 60's (57 in my DP's time) you get kicked out on to the street with nary a "thank you for a job well done"!

As for the last paragraph about getting an advisor about exiting from the workplace.......where?  In the taxi they had waiting for those who were getting kicked out that morning?  In the real world one doesn't always have time to find someone to advise them.  My advice is that one needs to oversave as much as possible so that when these problems occur, one can have their finances ready to support them.  Life is never like it seems in the movies or financial journals.  It can come at you like a storm out of Hell and turn everything you planned for upside down.  What we have to do is spend our lives always preparing for the worse and hoping it will never happen.  If it does, that is when you are so grateful you ignored all the financial experts and locked in your long term CDs so you can survive.  Sorry abour the rant but these kind of articles do not bring the best out of me.  Thank you.
Paoli2   |     |   Comment #6
YT:  Do you realize how stupid your posts are?  Most intelligent posters on here (not "you" of course) surely understood that my DP was not physically "kicked out on the street".  It is an expression sane people use and other "sane" people understand.  So guess what that must make you?  I was not apologizing for a rant because it was not a rant except in your mine.  Also, who are these "WE's" that you keep referring to?  Are you also Schizo?  If so, take your meds and your "WEs" to bed.  I think you need your rest.    Have a good night and find a good toy to play with.  I'm tired of being your toy.
Paoli2   |     |   Comment #12
Quiero #11:  #10 is pushing his luck bringing my DD's medical problems into his posts.  I don't care what any of you think about ME but my daughter is OFF LIMITS for these type of sick posts.  It is obvious YT has no conscience or he would not bring innocent people into his sarcastic posts about me.  READ KEN'S POSTING RULES!  This type of behavior is not allowed and I hope the Deleters do their job and stop it before it goes too far.  If anyone wants a fair fight with me, it belongs in Private Messages, not on Ken's blog!
decades   |     |   Comment #16
"Where" are these great jobs where companies are giving workers a choice of when they want to retire? Sadly these are federal jobs in washington DC. my brother lives in Cherrydale borough in Maryland about 10 minutes from DC. Its booming there ! Money flows from the half that pay taxes to DC for redistribution.
Paoli2   |     |   Comment #22
Quierco/TY:  How disgusting to see someone use another man's hard work on a website to help so many others and he not only spends his time trying to cause a flamewar but he insults the person whose site he is using???  Do you have to keep rubbing it in on KEN that the Savers Petition he hoped would be a great success was a huge failure because we could not get enough members to back it?  LET IT GO!!  You are not insulting ME when you keep bringing up the Petition you stupid fool, you are insulting KEN and using HIS blog to do it.  That is what infuriates me.  So if you don't like the food at this restaurant, go EAT someplace else!  You have nerve to stay here only to keep insulting Ken.  Either quit your crap or go someplace else to insult people!!  Others say I should just ignore you but you are like a sore that just can't heal.  You can't be ignore because that is what sets you off even worse.  If you give a **** about Ken and his posters, quit your pathetic crap!