Downsizing for Retirement – Three Things to Consider

March 20, 2018
972 Views

If you think that downsizing might be ideal for your retirement, then these are the things you’ll need to consider before making your final decision.

If you’re like most people approaching the age of retirement, then your home will be your most valuable asset. You’ve built up equity for years, and you may even be approaching the point where your mortgage is fully paid and you now have freehold title to your home.

No longer paying a mortgage can be a huge financial weight off your shoulders, and it can allow for more comfortable retirement living. However, if you wanted to take things even further, then you could increase your retirement wealth by selling your home and reinvesting in a smaller and less valuable property. You’ll get to keep the profit you make after tax, and this could be reinvested or simply put away into a high interest savings account for emergencies or unplanned purchases and expenses.

Downsizing, Run The Numbers

Look at how much your home is worth, and then figure out the minimum home value you would consider for a smaller replacement home. If you are going to move to a new city, then you will have to consider property values in the area. You might pay a premium for a downsized home in some areas, so make sure you’re aware of this before pulling the trigger on any major financial decision.

If you are still paying a mortgage on your home then you will need to calculate the difference after sale, and whether or not you will have the equity to buy a downsized home outright. If you will need finance for a new mortgage, then this could make downsizing less attractive.

Don’t Expect a Huge Cash Gain

Downsizing usually means moving to a property with maybe 70 – 80% of the value of your current home. If you own your home outright then this is going to mean a sizeable profit once you’ve sold your home, but the actual cash you get after taxes might not be as impressive as what you initially thought. Be realistic when downsizing. The biggest advantage will be a more manageable home with more flexibility in your finances.

Consider Modifying Your Home to Generate Passive Income

Another option is to downsize in the home that you already live in. With modifications you could create a duplex property that provides a passive rental income from the other property. Depending on local rules, you could even subdivide and sell part of your property. This could work out better in the long term and could leave a significant financial asset for the benefactors of your will.

Downsizing works well for some people, but it’s not for everyone. Make sure you look carefully at all of your options, and only downsize if it is going to improve both your quality of life and your retirement finances.

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