At first glance, downsizing to a smaller home may seem like an easy way for retirees to slash their housing and utility costs. In reality, this is not always the case.
Among retirees who move in their golden years, nearly half end up downsizing, many citing cutting home expenses as the primary reason, according to a retirement study by Merrill Lynch and Age Wave.
But downsizing doesn’t always come with savings, Money reports. In fact, some moves could cost you.
“I’ve seen people who want to move to places where the taxes cost more than for the house they are moving from,” Ray Mignone, a financial planner in Queens, New York, said in an interview with Money. “They just didn’t do enough due diligence.”
There can be significant costs related to downsizing, including paying a real estate agent, closing costs and moving expenses, writes Huffington Post columnist Ann Brenoff.
“If you are going to pay thousands in real estate and closing costs plus more thousands to a moving company to lug your belongings somewhere new, how long will it take you to recoup those expenses if you are only saving $350 off your monthly housing note?” Brenoff writes.
According to Money, answering these four questions could help you avoid making the wrong move:
- Where to? If you’re hoping that scaling down your housing will pad your retirement fund, be careful about where you choose to move. The transition itself, which includes moving expenses and broker fees, costs about 10 percent of the price of the home you’re leaving, Steve Sass, program director for the Center for Retirement Research, told Money. Make sure you check property tax and home insurance rates.
- What kind of home? Although condos are typically cheaper than single-family homes, the shared maintenance and homeowners association fees could add up. Consider all the costs before deciding where you want to settle down.
- Buy or rent? Renting sometimes makes more financial sense than homeownership. “If you’re not absolutely sure you want to be somewhere for more than five years, don’t buy,” says Chicago financial planner Don Duncan. Click here to get help on whether renting or buying would be the best fit for you.
- When is a good time to move? Sooner is likely better than later. “You’re likely better equipped for the physical and emotional stress of a move in your 60s than in your 80s,” Money suggests.
If downsizing doesn’t cut your home expenses by at least 25 percent, it’s probably smarter to skip it, says Smart About Money, a nonprofit financial resource web site.
If you are looking for some extra money in retirement but don’t want to move, there are other options.
“Other ways to get cash out of your house might be to rent out a room to someone or to list all or part of it on a peer-to-peer vacation rental service,” Brenoff writes.
Check out: “15 Steps to Profit by Renting Your Home to Visitors” and “22 Odd Ways to Make Extra Money.”
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