When parents are considering downsizing their home, it is not solely about moving into a less expensive, smaller place to live. It is probably about all that and more, particularly if they are reflecting on ways to improve their financial footing for retirement. Depending on their situation, downsizing could put them in a better position to age in place and enjoy some financial comfort in later years. It may also improve their overall financial health, making it more likely they can meet some of the financial demands that naturally arise in old age. Many parents are keen to downsize, but there are still many unknowns regarding exactly what this means in practice and what it will accomplish. This Money Talk News article strives to probe and uncover important facts to help guide ageing parents and their families through this potentially pivotal decision.
The Motivations for Downsizing
Before getting to the financial angle, let’s explore scenarios that might motivate your parents or in-laws to consider downsizing. Motivations might include:
- Maintenance: A smaller house is simpler to maintain/requires less maintenance. Fewer chores to do the upkeep required on a small structure is likely to be less than on a large one. The smaller the structure is, the less there is to maintain, which suits some groups in our society well, notably the small, frail, chronically ill, etc. If it’s physical labour that these people find arduous, a smaller home will certainly be easier on them.
- Downsizing Reduces Overhead: lower utility bills, property taxes, and insurance costs can result.
- Gaining Access: If your house is too big, selling it and releasing some equity could provide funds to aid with retirement goals or health expenses.
- Increase Wellbeing: A move might allow someone to live in a community with amenities and support services planned for seniors, helping increase quality of life.
Financial Implications of Downsizing
1. Selling the Current Home
The sale of the current home can have various financial implications:
- Market Conditions: The price at which the house sells will depend partly on the value of the home at the time of the sale, and partly on local real estate market conditions. Your local real estate agent can fill you in on market conditions and suggest a fair asking price.
- Real estate commissions and fees: Depending on what you paid for the house, you may encounter several costs associated with selling the home. Broker’s commission or agent’s commission, closing costs, and perhaps some repairs or staging expenses.
2. Purchasing a New Home
When purchasing a new, smaller home, several financial considerations come into play:
- Price Difference: How much money will you net from the sale of your current home, and how much will the new home cost? A smaller home will probably be cheaper, but this may depend on where you live and the current housing market.
- Mortgage Considerations: Should you need a mortgage to purchase a new home, be sure to look at interest rates, terms, and monthly payments. A smaller loan or cash purchase will lower your monthly expenses and ultimately stabilise your cash position.
3. Property Taxes and Insurance
Downsizing often results in changes to property taxes and insurance premiums:
- Property smaller homes or one in a different location might have lower property tax liabilities, but current tax rates or future changes in those rates vary quite a bit and are directly tied to assessed property values (which vary by more than current selling prices do).
- Homeowners Insurance: Though the smaller home might have lower insurance costs, you should check the coverage against your needs, especially if it has different features or a different risk structure than the old home.
4. Moving Costs
The cost of moving should be planned for:
- Hiring professional movers: They make the job easier although it is expensive. Ask for quotations from several moving companies, and keep in mind extra charges like packing materials or storage.
- Specialised downsizing services: Some companies specialise in assisting seniors to downsize, e.g., by sorting, packing, and organising. These services can be helpful but may end up increasing the overall cost.
Financial Benefits of Downsizing
1. Increased Liquidity
That extra cash is freed up by downsizing – money that had been tied up in home equity. What can that extra money be used for? Why, for all of the above, of course! But is it a good idea? Perhaps. On the upside, homeowners can take advantage of their good fortune by:
- Supplementing retirement income: The proceeds from the sale can help supplement retirement savings and provide extra financial security.
- Paying for Medical Bills: Set aside money for potential medical expenses, or for long-term care expenses later in life.
2. Reduced Ongoing Expenses
Smaller homes typically come with lower ongoing costs:
- Utilities: Heating, cooling, and other utility costs are often lower in a smaller home.
- Maintenance and Repair: Less space and fewer systems means lower maintenance and repair costs.
3. Access to Senior-Friendly Communities
Moving to a senior-friendly community or independent living facility might offer financial advantages:
- Meals, housekeeping, and transportation are often bundled for convenience and to make the budget easier to manage Some communities bundle their services, meaning that meals, housekeeping, and transportation, for example, are offered as part of a single package. This can ease budgeting and reduce costs in general.
- Social and Recreational Opportunities: These communities often offer ‘social and recreational opportunities’, which can enhance the quality of life.
Planning for Long-Term Financial Impact
1. Evaluate Long-Term Costs
When downsizing, it’s important to consider the long-term financial impact:
- Future healthcare needs: Will you have additional funds from downsizing to pay for future healthcare needs or long-term care?
- Estate Planning: Update estate planning and beneficiary designations to reflect current wishes.
2. Seek Professional Advice
Consulting with financial professionals can provide valuable insights and help with planning:
- Financial advisors: Downsizing experts can evaluate how it affects your overall financial health, and craft a strategy for optimising the use of proceeds.
- Real estate agent: Professional realtors in the area can advise about market conditions, values, and buying/selling.
- Elder Law Attorneys: Can be helpful with legal matters, and later-in-life issues such as estate planning and long-term care planning.
Emotional and Practical Considerations
1. Emotional Impact
Many downsizers, too, are motivated by much more than just a rational calculation of the benefits and drawbacks. It’s often an emotional move, even if it doesn’t involve a particular beloved home but relocation altogether and that emotional process needs to be acknowledged.
- Having Support Systems: Having a dependable network of family, friends, and neighbours helps seniors age gracefully Health Promotion: Promoting health and preventing disease should be of prime importance to seniors, as it keeps them engaged and motivated.
- Comfort and Familiarity: What comfort and familiarity features should be in your new home?
2. Practical Transition Planning
Effective transition planning can ease the process:
To reduce potential stress, declutter and sort your belongings before the move.
Finding New Services: Research which local services and amenities are available in the new area and how to access them, eg, how to find a GP or paediatrician, where to shop for groceries, and where to find social activities.
You may think of it as your parents downsizing, but for individuals and couples in their 60s and 70s, it’s more than just a ‘downsize’ it’s strategic. For those whose careers have left them ending up with a larger home than they truly need, the financial benefits can be substantial. But without some careful analysis of the financial implications, a reshuffling of living arrangements can spell trouble. The downside of any financial strategy is the potential for unintended consequences, so before your parents make a decision, families should always weigh the costs and benefits of selling and buying, of moving and staying, to ensure they can make a decision that’s financially sound and in line with the family’s goals for the future.
And then planning for some emotional and practical downsizing, which can also make ageing parents move a much smoother and more comfortable transition that will lead to a happier life.
