With the exception of those under 35 years of age, between 60 and 70 percent of the median household wealth in the US is tied up in home equity. Those within 10 years of retirement have about 40 percent of their net worth held outside of their home equity, and the number gets worse from there. All Americans who are older than 65 hold only 28 percent of their net worth outside of their homes. This is why it might be a good idea to start thinking about downsizing in retirement.
There are many benefits that come from choosing to downsize during your golden years. Here are a few:
Lower Utility Costs
One of the big expenses that comes from owning a home is the utilities that a homeowner uses up. On average, heating and cooling are the source of 42 percent of household energy costs. Less space will generally mean less expense in energy costs as long as a family maintains a home in the same geographic area.
Lower Property Taxes
Homeowners have to pay the government for the privilege of owning property. There are a few states that offer tax abatement for retirees, but most will still have to pay property taxes. By choosing to downsize, the value of the home will go down. Because the property taxes are tied to the value of the home, a less-expensive home will lead to a lower tax bill for retirees. This will allow more flexibility for living expenses.
Lower Insurance Costs
As long as a new home is located in the same general area, it’s likely that a home that’s less valuable will take less to insure on a yearly basis. Downsizing will therefore likely cut property insurance premiums. This cost savings should go into the planning equation for new retirees.
Cleaning can be a hassle for those who work on a daily basis. However, younger people will be better able to take care of a large house and a large yard. As people age, these tasks that used to be easy will start to become more difficult. A smaller yard and a smaller house will likely cut down on the difficulty of these tasks for retirees.
Access To Home Equity
Perhaps the biggest benefit of downsizing during retirement is the fact that it allows you to access home equity. If the bigger house is paid off, it’s likely that buying a smaller home with cash will lead to a nice windfall that could provide some residual income or a cash hedge against a drop in the market immediately after leaving the workforce.
Possible Negatives Of Downsizing
While downsizing can be a positive option, there are some negatives that come with including this option in your planning as a retiree. First, you might lose memories that are tied to a home. Additionally, there may be some hefty expenses that can come with downsizing. These could include some repairs or maintenance that you’ve deferred for a few years. While there can be savings in terms of taxes, utilities, and insurance, there may not be much equity left after paying off an older home so your immediate cash position may not see much improvement.