I was happy to be a resource for Sara O’Brien of CNBC for the article “Older Americans planning to downsize should brace for sticker shock” which highlights the surprises that retirees can face when downsizing. We had a great discussion about the types of expenses people often forget, the types of housing I see clients gravitate toward, and if the cost of the square footage downsized home is dollar downsized as much as people originally had envisioned.
Why retirees might not get as much equity out of downsizing as they thought
When thinking of “downsizing,” people often assume that if they reduce the size of their home, the purchase price will also be lower. That isn’t always the case. Oftentimes, people are looking for newer homes that will require less maintenance, and may even be attracted to villa homes that include (for a fee) exterior upkeep such as snow shoveling, yard work etc. Those types of homes cost more. You may end up downsizing the square footage, but upsize the amenities.
People often forget that they will pay a 6% sales commission to the realtor to sell their home, which translates into a smaller check at the closing table than they originally thought. For a $450,000 house, it is $27,000 less for their retirement than they were thinking. Especially considering they are also using the proceeds to buy another house.
Due to years of watching HGTV reveals, people swing open a front door and expect to be wowed. Knowing this a Realtor’s marketing plan will include a list of staging ideas and home repairs designed to maximize the sales price and reduce the number of days on the market. These expenses are often overlooked because they cover more items than they used to, Pre-HGTV.
Moving expenses and the cost of setting up the new home add up as well.
Why it pays to plan when thinking of downsizing
One benefit to downsizing, even if the reduction is not significant, is if you currently have a mortgage, and you move to a less expensive home, you can improve your monthly cash flow by doing away with the monthly principal and interest mortgage payments (you will still pay taxes and insurance each year.) Or of course, if your current home is paid off, you will walk away from the closing table with equity out of the house, which is what people traditionally think of when they think of downsizing.
Another benefit is in the form of improved monthly cash flows, due to a reduction in housing costs, such as utilities, home owner’s insurance, and potentially real estate taxes.
Michele Clark
Michele has more than 25 years experience in financial services and has developed a specialization in working with people who are starting to seriously think about their retirement or who are retired and facing all of the complex planning issues one faces during this time.
She works with clients to coordinate decisions around investments, retirement accounts, Social Security, funding health care, tax planning, cash-flow, maximizing employer benefits, charitable gifting strategies and estate planning.
Before joining Acropolis Investment Management, Michele was the founder and managing principal of Clark Hourly Financial Planning and Investment Management for nearly nine years with an additional sixteen years at banks and investment firms.
Michele has been quoted in such online and print media outlets as The Wall Street Journal, Money Magazine, USA Today, Market Watch, US News & World Report, CNBC.com, AARP, St. Louis Post Dispatch, Fox Business, Forbes, Los Angeles Times, Financial Planning Magazine, St. Louis Public Radio, Yahoo Finance, St. Louis Magazine, and others.
Michele earned her B.A. from Purdue University. She is a CERTIFIED FINANCIAL PLANNER® practitioner, obtained the Chartered Retirement Planning Counselor (CRPC®) designation from the College for Financial Planning, and is a NAPFA Registered Investment Advisor.
Michele has volunteered her time for financial literacy outreach at Financial Planning Days, Money Smart Week, Habitat for Humanity and others.
Michele has served on the Board of Directors of the Financial Planning Association of Greater St. Louis since January 2014 and is Past President and currently serving as Chair of the Board.