A person’s choice of retirement housing can greatly affect the amount needed to save for retirement. Trading down to a smaller home, say from a $250,000 four-bedroom house to a $150,000 two-bedroom condo, can be a very effective catch-up strategy. Benefits of trading down include:
• Proceeds from the sale (minus sales and moving expenses and the cost of a new home) are available to invest for income.
• There are generally lower maintenance costs, property taxes, and utilities on a smaller property.
• It may provide an opportunity to live in your current community but at a reduced cost.
Thanks to 1997 tax law changes, there are no longer any age requirements to consider before trading down. There are also generous capital gains tax exclusions of $250,000 for single taxpayers and $500,000 for couples filing jointly so that many people won’t owe any taxes on the sale of their home.
The big trade-off for this strategy is less square footage and storage space. For many people, just the thought of downsizing and selling prized possessions can be overwhelming.
Another way to reduce living costs in retirement is to move to a less expensive location in the United States or even abroad. This strategy works well if you currently live in a high cost area. This way, you may be able to retain similar square footage to what you presently have but at a reduced cost and not have to sell a lot of possessions (you will have to move them, however).
As with the trade-down strategy described previously, the difference between the sales price of your current home and the cost of a house in a less expensive area can be invested to produce income. Ongoing state income taxes and property taxes may also be lower in a less expensive locale.
A major trade-off of this strategy, however, is less proximity to family, friends, and community. Many families find it difficult to “pull up roots” and start all over in a new location. This can be especially difficult for older people if they have several physicians for special medical needs. Not surprisingly, less than 5% of Americans age 65 or older have moved in recent years, according to the U.S. Census Bureau. Instead, many people prefer to “age in place” and stay in their current community.
If you are considering an out-of-state move as a way to reduce living costs, visit potential retirement spots on vacations and subscribe to their local newspaper. Get a “feel” for the community that you are considering, and inquire about cultural activities, medical facilities, etc. Also factor in moving costs, the cost of travel expenses to visit family and friends, and the potential need for paid caregivers as you age if a family support network won’t be living nearby.
Also important in the decision to sell a home would be the cost of living in a new location. It could be that expenses for rent will be greater than the cost of home ownership, particularly if your current home is an older home. Along the same lines, it is wise to look at the actual differences in the cost of living in the current location versus another, should you be moving any distance.
Also, if you buy another home, there are the expenses related to the process of selling such as commissions, legal fees, and closing costs that can whittle away at the amount of profit from a home sale. Some people make the mistake of being overly optimistic about the price that their current home will actually sell for.
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