By Randy Neumann
You’re near retirement. Your large home is nearly or fully paid off. The kids are gone, but the high upkeep costs are not. Should you retire and keep your home or should you retire, sell your home and buy a smaller, less expensive, place, a.k.a. downsize?
This is a common quandary that many folks find themselves in today, based on financial and lifestyle trade-offs. There is no right or wrong answer; instead, there are many possibilities.
So, the way to begin your study of “Should I downsize my home?” begins with cash flow projections. Most medical examinations begin with blood pressure and heart rate tests. Similarly, since cash flow is the heart and circulatory system of financial planning, we begin a plan with a study of cash flow.
In scenario one, you have the big house in an “expensive” town with a good school system. The kids are gone so you no longer need a great school system. Property taxes are lower in nearby towns, so why not downsize and put the savings in your pocket?
Another consideration is your mortgage. If you have been in your current house for a long time, you could be at the “back end” of your mortgage. Mortgages are designed to be mostly interest payments at the front end and mostly principal payments at the back end. So, if you have a mature mortgage, you are paying mostly principal and little interest.
If you were to buy a new, less expensive home and finance part of it with a mortgage (not a bad idea with rates below 5%), you would reverse the trend and have the bulk of the payment applied to interest. Many people in retirement find tax write-offs hard to come by, so a mortgage deduction can be a welcome event.
Conversely, with the lack of prepayment penalties in today’s mortgages, if your mortgage payments become challenging, you can always pay off the mortgage without any penalties.
Another consideration is the cost of living. Here in the Garden State, we are among the highest cost of living states in the country. That’s fine when you are working and earning some of the best incomes in the country, but when you retire, it’s like being on a seesaw when your partner hops off. So, moving out of the area can really cut down the nut.
However, this decision (as many others in financial planning) is not just about money. Other considerations are about lifestyle. Maybe you can’t keep up with your present home, i.e., you have trouble with the stairs. Perhaps a 55 and over community appeals to you, or you want to escape the snow.
On the other hand, if friends and family here mean a lot to you, moving is out of the question.
Well, you could have the best of both worlds. If you don’t like the snow, buy another property in sunnier climes and go there in the winter, but be sure and do your homework. I have had clients who had a place in Florida and loved it in the wintertime, which was the only season that they stayed while they were working. When they retired, they pulled up the stakes and headed south. To their chagrin, they found that they hated it in the summer, when the humidity climbed up the walls and the palmetto bugs, a.k.a flying roaches, cruised the air.
Instead, be more like another client I have who set out on a mission to find a lakefront house in a warm climate for $750,000. Where did that number come from? We ran several cash flows with different mortgage amounts, tax burdens, living expenses and other key factors until we got what was right for him.
He began his search in the Carolinas, where he found prices to be over $1,500,000. He headed farther south and hunted until he found his dream house on a beautiful lake in the great state of Tennessee for the price that was right for him and his wife.
The moral of the story – a lot of planning goes a long way.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.