Good Life

Is it time to downsize to boost your retirement savings?

Editor’s note: This column is part of the CDT’s Active Life special section.

It’s no surprise that the average American nearing retirement age does not have adequate funds saved up to last them the 30 years or more of living after retirement. For this group, downsizing is a great option as it might enable them to lower their monthly costs and boost their savings by using the excess equity on living expenses.

In light of trends in the housing market, now is the perfect time to downsize. Each individual or couple will need to look at their own situation, however. Some of the factors to consider when evaluating whether to downsize include examining retirement assets, the home’s equity and the vagaries of the housing market and the homeowner’s evolving needs and lifestyle as they age.

The housing market

People in their 50s and 60s who visualize filling an empty nest with visiting children and grandchildren at holidays should consider the costs of maintaining a large house against the fact that it is a seller’s market.

There is a national shortage of home inventory for sale, partly because builders are not creating as many new homes as they were in the pre-crash days. As a result, there is a sizable gap between the homes available and the demand, according to Realtor.com. This helped fuel the past year’s 6.7 percent increase in home values in the State College area, according to Zillow.

Interest rates are now in the low fours and rising. It might make sense for those who are downsizing to unload a big house before higher rates force any potential buyers to reconsider. It remains to be seen if strong appreciation in the housing market and an increase in interest rates can be maintained.

Another reason to consider downsizing sooner rather than later is the likely increase in demand for smaller homes. Millennials have been largely sidelined from purchasing homes due to the tough economic conditions they grew up under and the high levels of student loan debt they’re straddled with. But in a few years, millions of first-time buyers will want to become homeowners and they won’t be able to afford the big houses retirees want to sell. A likely future scenario will be a fierce competition between millennials and retirees for smaller homes. This will not affect pricing in areas catering to those older than 55, but will affect supply in the general market.

Lastly, while builders aren’t building as many homes as they once did in the peak of 2006, the homes they are building are big 4-or 5-bedroom houses — like the ones retirees will want to sell. So in a few years those looking for four or more bedroom homes will be in luck because there’s going to eventually be an excess supply of those homes. The majority of buyers will compete for two and three bedroom homes. By downsizing now, those nearing retirement age will likely have more and better-priced smaller home options.

Health and aging considerations

Homeowners are often reluctant to move because they love their residence or neighborhood. But the realities of living in those homes decades later are an important concern. Will they be able to afford major maintenance expenses down the road once they are no longer working, or will the value of the house decline because of benign neglect?

Another factor to consider is the age-appropriateness of the residence down the road. Older adults with two-story or split-level homes may want to move to a single-story residence before the stairs pose a health risk. Staying put can be viable, with home improvements. But the cost of upgrading is a significant expense. Of course, another option is to consider a reverse mortgage. But this should not prevent downsizing as you can have a reverse mortgage on a smaller home as well.

Deciding whether to move in preparation for or after retirement is not easy for anyone.

Ash Toumayants is the founder of Strong Tower Associates, a central Pa. retirement planning firm.

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