When planning for retirement, clients often face a fundamental decision: With the kids grown and moved out, is it time to sell the family home and downsize?
The answer depends on many variables, and to navigate a potentially thorny issue, advisors must balance a complex mix of financial and emotional considerations, any of which could tip the balance between success and disaster.
“Moving to a smaller home in retirement could be an obvious smart choice for many, but it doesn’t always make financial sense,” said Kurt Whitesell of Summit Wealth Group in Rapid City, S.D.
The financial logic behind the idea is that selling a large house to purchase something smaller will save money, he said. The upkeep should be cheaper, and the mortgage or home-equity loan, if any, less expensive. But the reality is more complicated, he said, when you figure in “inflation, building costs, moving expenses and higher interest rates.” Which means this isn’t always the best move.
The first step for advisors, he said, is to crunch the numbers and develop a financial plan that ensures the client’s cash flow can support a move. The plan should include the true cost of the new home and how much will be netted from selling the current one. And clients shouldn’t forget to review potentially costly consequences such as capital gains taxes from the sale of the old place, property taxes on the new place, insurance on the new place, its utility costs and its monthly maintenance outlays, Whitesell said.
Another key factor is the location of the new home. It’s important to identify exactly where clients are considering moving to and then thoroughly research the advantages of that location.
For example, Don Grant of Sabre Wealth Management in Wichita, Kan., said the new area should offer lifestyle benefits such as entertainment, transportation and doctors. “Downsizing cannot be confused with paying less for housing,” he added. “Often, downsizing means purchasing a smaller home in a community with homeowners association [dues] and amenity expenses that end up costing more than if [the client] were to stay in the current home.”
He often cautions clients, too, against automatically moving to wherever their children have moved to, since the kids’ agenda might be different from the parents’. The new place will have to be well suited to the older generation’s needs—and the kids ought to be truly committed to staying there. “Wait till they indicate that they will be there for the long haul before going to the expense and trouble of selling your place and moving [to the area to join them],” he said.
Clients don’t always accept this kind of advice, Grant added. But it doesn’t faze him. “My job often involves telling clients what they need to hear, not necessarily what they want to hear.”
If clients can’t afford their current home any longer, he will illustrate the trajectory of their finances going forward and what will happen if they make no changes. He always offers possible solutions, he said, but ultimately it’s up to the clients to decide what they do.
Whatever the decisions, it’s incumbent upon advisors to help make sure the clients are informed about them, said Jeremy Shipp, founder of Retirement Capital Planners in Richmond, Va. “Run projections about how the move [to a smaller home] will impact their finances,” he said.
Sometimes, he added, it’s best for your clients to consider renting an apartment in the new location before committing to a home purchase. This will give them a chance to test the waters.
Whatever the situation, he said, the clients should choose the option that suits their idea of a successful retirement—as long as it “fits within their financial circumstances.”
Sometimes, keeping the old home hinders the client’s ability to build other assets. Selling it may yield free cash that they can use to augment an investment portfolio.
“I often refer to home equity as a ‘dead asset,’ because homeowners with significant equity can’t tap into it unless they take out a loan,” said Whitesell. “Personally, I prefer to invest in other financial assets that generate dividends and appreciate over time, rather than being tied down by my residence.”
The Emotional Side
But the reality is that housing decisions often have less to do with dollars and cents and more to do with pleasure, sentiment or desire. Whitesell himself said he decamped to a smaller home after his kids moved out, and he was pleasantly surprised by how much the relocation enhanced his quality of life. “Although the cost of our smaller home was about the same as our larger one,” he said, “the overall living experience has been much more enjoyable.”
To be sure, “quality of life” can be hard to quantify. Where clients choose to live may involve a complex, emotional minefield. A home that’s been occupied for many years is often full of precious memories.
To balance the emotional and financial considerations of moving, many advisors stress the importance of zeroing in on their clients’ true motivations and goals. Do the clients really need to save money, or is the decision to move more a matter of streamlining their lives? Do they want to be nearer to children and grandchildren, or perhaps to bask in a warmer climate?
“Downsizing a home is really not the right approach,” said Jason Bottenfield, a managing director at the Park Cities Group at Steward Partners in Dallas. “Simplifying their household should be the new moniker.”
That simplification can take many forms, he said. To anticipate any infirmities that come with aging, for example, clients might need to leave a two- or three-story house for a single-story home. They may want to leave an old place and go to something built more recently to reduce the potential for broken pipes and other hassles.
Whatever the case, he said, “you’re really just trying to simplify your life with fewer stairs, lower property taxes or less maintenance [such as] not having a pool to clean or large square footage to tend.” Single-family homes, he said, are “not great investments as you get older. The work that goes into them can be burdensome on time or your money.”
If simplifying the client’s life is the primary objective, then there is no particular right or wrong time to move, he said. The best time for giving up a family home is “whenever your plan for life in retirement makes sense to do it,” he said.