The Downsizing Myth
As a financial planner, I’ve had the pleasure of working with well over a thousand individuals who are currently, or are approaching, retirement. There is a common theme (or shall I say misnomer) with all of them. They all talk about how they’ll likely “downsize” in retirement.
Early in my career, I simply took down these notes and smiled. Now, after seeing this progression play out many times, I can now tell you that retirement downsizing is a myth. Gone are the days of sitting there quietly smiling. One of the big benefits of working with a financial planner is perspective. I’ve seen “retirement downsizing” played out numerous times, with others very much like you. Generally, it goes something like this:
The Myth
Client: “Andrew, when we retire, we are going to sell our home and downsize to Florida.”
Me: “That’s great! Tell me about the cost of this house?”
Client: “Well, we’ll sell our $500,000 home here and buy something for less. Let’s say $250,000 down south.”
Me: “Oh really? So, you think you’ll have a quarter of a million dollars to add to your retirement savings to help subsidize your retirement?”
Client: “Absolutely!” ***
Let me ask you. As you read this, have you had this conversation and/or thought about it yourself? Don’t be shy. You can admit it; you wouldn’t be alone. So far, I can only count on one hand how many times a scenario like that has actually happened. ONE HAND!
The Reality
It’s funny how sometimes things don’t play out the way we think they will. Truthfully, people almost never downsize their home in retirement. Rather, I see one of the following things happen:
Rightsizing –
This is when someone does move in retirement. They sell their $500,000 home of 25 years and head south. They look for homes and find a beautiful three-bedroom condo in Florida right on the water. It’s perfect! Their kids and grandkids can come visit over long weekends. True, this condo is smaller than their 3,000 square foot cape cod up north. But, guess what this new construction condo happens to cost? You guessed it, a cool $500,000!
Upsizing –
I actually see upsizing more than you think. Upsizing is when retirees choose to buy a more expensive home in retirement. Either they move closer to their children in expensive areas, or they decide to live in a more lavish part of the country. It’s surprising how often this happens.
No-sizing –
Change is scary. Many hate the idea and get complacent in their current lifestyle. It’s people subscribing to the notion of the devil they know, versus the devil they don’t. Thus, what I call “no-sizing” tends to be very common. This is where people discuss moving for years, but eventually realize they are happy where they are. Often, there is cosmetic work to be done, but these folks are happy staying put.
Multi-sizing –
This is where I see couples sell their $500,000 home and buy a small condo in Boca Raton, while keeping a small condo where they previously lived. They’ll use that $500,000 budget to purchase two homes for the price of one. Usually, this leads to a more expensive monthly lifestyle (irrespective of the fact these two homes cost the same as their previous one). Now, there are two sets of utilities, property taxes, insurances, and home expenses. This a very common outcome in retirement as people try to find that balance of where to spend their time. Often, they find their time gets split due to weather, family, or lifestyle.
Downsizing… but –
The last scenario I oftentimes see is close to downsizing, but not completely. It goes something like this: a couple sells their $500,000 home and actually buys a smaller, more manageable $400,000 home. However, they want to make this home “just right.” After moving and closing costs, they decide to do some minor house remodeling. By the time all is said and done, this $400,000 downsizing winds up using extra money and nothing is left over.
A House is a House is a House
There you have it, the five most common “downsizing” scenarios I see current (and future) retirees facing. As you can see, none suggest people sell their homes, take a huge windfall, and reinvest those dollars into their retirement investments. You see, these dollars are already mentally allocated towards housing. Once they go there, it’s compartmentalized and rarely gets thrown back over the fence into the retirement bucket.
This is why I don’t consider one’s home an asset for financial planning purposes. It simply stays as a place to live and rarely (if ever) turns into a viable asset off which to live. Housing, both before and after retirement, takes a lot of thought and careful planning. While the center of your life (I mean, come on, all your “stuff” is there), one must effectively understand where these allocated dollars come into play. If you want to “downsize” in retirement, great. But, you don’t have to.
Planning now can help you realize that (perhaps yet unknown) dream of a bigger house, that new home in Miami, or that second house in the Poconos. It’s part of the dreams we help you fulfill. Give us a call to start that planning foundation.