It is safe to say that most baby boomers and empty nesters assume that downsizing their homes will also reduce their cost of living and pad their retirement savings. After all, the name implies a drop; but experts warn this might not be true.
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For many boomers, their home is the single, most valuable consistent asset they have to enter their golden years with. However, a recent report personal finance website GoBankingRates explains that often times “downsizing” can cost a homeowner even more money than staying in a home they own.
"Saving money in retirement or after adult children have left the family home is definitely possible, but downsizing in the traditional sense may not always be the answer," said Go Banking Rates.com managing editor, Casey Bond, in a press release. "Empty nesters and retirees who want to cut their cost of living should consider alternatives as well, like renting."
To get some insight as to the pros and cons of baby boomers downsizing, I spoke with Bond and asked her the following questions:
Boomer: What costs should baby boomers take into consideration before making the decision to sell their home?
Bond: There are quite a few expenses to keep in mind before making the decision to downsize. The most important would be the potential loss a homeowner could take by selling his or her current home. If the local housing market was hit hard by the mortgage crisis, a boomer’s home could be worth significantly less today than when originally purchased.
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Additional major expenses include realtor fees and commissions associated with selling a house and buying a new one, as well as mortgage loan closing costs in the case of refinancing a mortgage. Other, smaller costs that can add up are moving expenses, new condo or HOA fees, and a possible heightened cost of living, depending on where the retiree moves.
Boomer: Is there an advantage for boomers who have no mortgage, to sell their home and move in with a family member for their retirement years?
Bond: Obviously this would be a very cost-effective option, resulting in a large, lump sum to be added toward retirement savings. However, it’s important for boomers to consider their preferred lifestyles before making the move. They may find that the savings found by moving in with adult children aren’t worth giving up much of their privacy, space for entertaining, or a home to leave for their children or grandchildren.
Boomer: How would downsizing your home aid in saving money for retirement?
Bond: One of the biggest savings boomers could realize by downsizing is reducing the cost of their mortgage. A smaller-sized home is usually a less expensive home, so homeowners may be able to buy property outright with the proceeds of their home sale, eliminating mortgage payments completely, or at the very least, reducing them significantly.
Additionally, less square footage often means utilities like heating and electricity are much less expensive. Fewer rooms and a smaller yard allow boomers who have downsized to eliminate hired help to assist with upkeep. Finally, some retirees move to neighborhoods with better walkability allowing them to drive less and save on gas and car maintenance.
Boomer: What advantages are there for boomers that decide to rent after they have sold their primary home?
Bond: Renting can be a viable option for boomers who are far behind in their retirement savings goals, see an investment opportunity that require a large investment, or simply wish to eliminate the cost and stress of things like taxes, insurance, repairs and maintenance on a home. Additionally, renting allows retirees more freedom, as they’re not tied to a home by mortgage debt, and can be less isolating than living in a large home alone.