When you picture the home where you’ll spend your retirement, what do you see? For many, the answer is a small bungalow near the beach, a spiffy little condo in the mountains, or a tiny, maintenance-free townhome near their grandchildren. But not all share this dream.
A recent study by Merrill Lynch found nearly 33 percent of Baby Boomers buy bigger homes when they retire. They aren’t interested in downsizing; rather, they want a larger property where scattered family can gather for holidays, or spare rooms for boomerang children. Fifty-one percent choose the reduce-and-simplify route, moving into smaller dwellings to achieve greater financial freedom (64 percent) or fewer maintenance requirements (44 percent).
If you’re among the latter—and considering downsizing—there are a few things financial and real estate experts suggest you determine before you proceed.
1. Know what you want.
The answer to this question isn’t all dollars and cents. In fact, the decision to downsize (or not) is often more about quality of life than it is about money. Talk to your partner about what really matters to both of you at this stage in your lives. Do you want to live closer to your family? Do you long to be part of a senior-focused community? Will less space prevent you from entertaining, practicing your hobbies or participating in other favorite free-time pursuits?
2. Know what your current home is worth.
How much can you actually get for it in today’s real estate market? Numerous surveys have shown that homeowners typically overestimate the value of their property by 10 to 20 percent. Request a competitive market analysis (CMA) from a Realtor familiar with your area. This report will show you the sales price of comparable homes in your neighborhood. You might also consider hiring an appraiser.
3. Know what a new home will cost you.
Real estate markets are improving around the nation. While this means your current property might be worth more than it was a few years ago, it also means that you’re unlikely to find a rock bottom deal on a new place. Once you’ve determined what you need (number of bedrooms, bathrooms, square footage, etc.) and where you’d like to live (such as a preferred neighborhood or metropolitan area), work with a Realtor to get an idea of what such a property is likely to cost you.
4. Know how much you’ll save.
Whether you’ve always wanted to downsize or are now feeling financially pressured to do so, figure out how much a move will actually save you. A smaller, less expensive home should have lower property taxes. And moving from a single-family property to a condo or townhome can certainly reduce your maintenance and utility costs. However, moving from the suburbs to the city usually means an increase in cost of living. Consider all the variables before making a decision.
Downsizing your home—especially if you’re able to net a nice profit in the process—can be a great way to supplement your retirement savings. However, it’s not the only option. Talk to your financial planner about alternative ways to tap into home equity and reach your retirement goals.
