When I look at my retirement stash, I have to admit it's kind of small. When I look at my house, I realize it's kind of big. And when I consider the two together, I think that maybe I should downsize and use the equity in my house to buy a condo or add to my retirement savings and rent.
Downsizing isn't for everyone, but it's one of the few strategies -- along with working longer, delaying Social Security or spending less later in retirement -- available to near-retirees who find themselves short on retirement savings and don't have time to catch up, says Steven Sass, of the Center for Retirement Research at Boston College. "The house is a major source of people's savings. If you don't want to work longer or give up eating out in retirement, downsizing should be part of the plan." (Another way to get at home equity is to take out a reverse mortgage; see Reverse Mortgages Get a Makeover.)
Do the math. Before you sell your house and move, add up the costs that can chip away at the amount you free up. For starters, fixing up a house to sell often means spending thousands of dollars in repairs and upgrades (new roof, anyone?). Once the house does sell, you'll pay commissions to real estate agents on both sides of the transaction, usually to the tune of 6% of the home's value. Packing and transporting enough furniture to outfit a two-bedroom condo will run $1,500 if you move a few miles away and $5,000 or more if you move across the country, according to the calculator at www.moving.com. As for the furniture you don't keep, you could find yourself spending a few thousand dollars to ship the good stuff to your kid across country and paying a hauler to cart away the rest.
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Even after the move, you won't be home-free. Condo association fees run at least several hundred dollars a month, on top of insurance and property taxes, and if the building needs a major improvement, such as a new roof, you'll get hit by a special assessment to help cover the cost. Renting is more predictable but leaves you vulnerable to annual rent hikes (see Rethinking Retirement: Retirees, Should You Rent or Buy Your Home?). And whether you rent or buy, you'll surely want to buy new furnishings that fit the smaller space, says Paul Miller, a certified financial planner in Boca Raton, Fla. "You think you're freeing up all this money by downsizing, and then you spend thousands to refurbish."
Other expenses you might not have considered: Instead of the driveway you currently enjoy, you'll probably have to fork over cash for a parking space. If you can't squeeze Grandma's armoire into the second bedroom (or bear to part with it), you'll pay $100 a month to rent a storage unit. Because you won't want to stash those old tax records in the second bedroom, you'll spring for storage space in the building. Moving far away from friends and family? Factor in the expense of traveling back to the old neighborhood a few times a year. As for the next family reunion, that won't be happening in your two-bedroom condo: Count on covering the cost of renting a beach house.
Of course, moving to a condo or apartment also allows you to cut your utility bills, eliminate yardwork and snow shoveling, and get rid of your mortgage or trade it for a smaller one -- and maybe you'll make your kids chip in for the beach house. Still, be sure to add up the pluses and minuses before you put out the For Sale sign, not after. (For a ballpark estimate of the costs and savings of downsizing based on your circumstances, see http://squaredaway.bc.edu/calculators/move-or-stay-put.)
"There are a lot of considerations that go into the downsizing decision," says Miller. "This may be the last move you're going to make, so you'd better make it a good one."
Jane Bennett Clark is a senior editor at Kiplinger's Personal Finance.
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