7 reasons to consider downsizing your home before retirement:
People often have a great deal of emotional attachment to the home where they raised their children. There are so many memories associated with virtually every room in the home, the yard, the neighbourhood. But, the home that was just big enough for your family is likely to be too larger relative to your needs in retirement. What has been an asset for the past few decades may now be more of a liability which gives rise to the opportunity of turning it into a new kind of asset.
1) Significantly reduce maintenance costs... Step back and take a realistic look at your home. What does it cost to maintain the home over the course of a year including utilities, yard maintenance, insurance, long-term repairs and maintenance such as painting, roof and systems repairs? By carefully downsizing you can significantly reduce these costs and thereby increase your retirement cash flow.
2) Eliminate your mortgage... When downsizing in preparation for retirement, find a home priced so that the new home has no mortgage. Being debt-free in retirement eliminates so much financial stress.
3) Convert home equity into investment equity... If you are already debt free, you may be able to use downsizing as a way to free up home equity which produces no cash flow and invest the money where it generates cash flow. Once you are retired, you'll realize that it's all about the monthly cash flow!
4) Be prepared for the next phase of life... Be very thoughtful about your retirement home purchase. It’s great to find a location that puts everything at your finger-tips...shopping, groceries, pharmacies, restaurants. However, the style of the home is also important. Too many stairs, for example, can become a real problem for people who may be one health issue away from reduced mobility. That may require that you move yet again. A home with minimal stairs and all living on one level, including a bedroom and bath for full-time help, if ever needed. Think ahead and be prepared.
5) Create the option of a reverse mortgage... Often people arrive at retirement ill-prepared, financially speaking, for retirement. By downsizing and being mortgage free, you can create the potential for doing a reverse mortgage. A reverse mortgage allows you to stay in your home but convert it into a lifetime income stream you cannot outlive and there is never a risk to you or your family that the debt on your home will exceed its value.
6) Establish a new lifestyle... Downsizing gives you the opportunity to hit the reset button on your lifestyle. Think about what would be perfect for you and see if you can find it.
7) Simplify your life... Don't automatically rule out apartment living. There can be significant advantages including all maintenance and amenities and much of your insurance costs included in your rent. Sure, they can, and will, raise the rent on you over time but you have all of the equity from the sale of your home invested and producing cash flow to help offset rent. As the property ages, you get to choose to move to the newest best place. Apartment living can greatly simplify life.
Bottom line: if you're now an empty nester, approaching retirement or already retired, thoughtful downsizing of your home can have a significant positive impact on your personal finances.
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