Can Downsizing Save You Thousands?

Is downsizing your house the secret to making your money go further in retirement?

Gregory Paul Johnson, co-founder of the Small House Society, an advocacy group for greener living, says it is. “Whether buying a home or renting an apartment, people can save thousands of dollars by downsizing even a little,” he maintains.

On the flip side, Anne Tergesen, a writer for the Wall Street Journal, says that’s not always true. “Moving to a smaller home is supposed to solve a lot of problems in retirement. But it doesn’t always work out that way,” she argued in a recent Journal article.

So who’s right? Everyone’s circumstances are different, but based on our firm’s observations of clients and their frequent budget struggles, we believe that many middle and upper-middle class people are being impoverished by oversized house bills, and need to set themselves free.

The mortgage is only the beginning

It’s not unusual to see situations where house expenses are eating up far too much of the client’s available income.  That’s true even in cases where there is no mortgage.

Where does it all go? In Florida, where many of our clients live, real estate taxes and insurance costs are steep. Taxes run about 2% of value each year, insurance may add another 1% or more. (That adds up to $15,000 per year on a hypothetical $500,000 home.) This is South Florida, so many clients pay for lawn service, pool service, neighborhood or homeowner’s association maintenance fees, and other services that might add another $5,000-10,000 or more. Throw in utilities (air conditioning bills), cable, and repairs and upgrades (a new a/c unit, tile roof, or replacement windows), and you’re talking a chunk of change.

Even without a mortgage, that hypothetical $500,000 house could easily cost $25,000-$30,000 per year or more to live in, without major repairs or upgrades. That’s a big chunk out of a retiree’s budget, which of course, also has to accommodate expenses for food, medical care, cars and auto insurance, clothing, travel and entertainment, and so forth. (And, don’t forget that many retirees are still paying monthly mortgage bills).

While we work with many clients whose homes are worth less, and many clients whose homes are worth more (after all, our area is anchored to the south by South Beach and to the north by Palm Beach), it is a cold, hard fact that many people are spending so much on their homes that they will find it difficult to afford everything else they want or even need. This is just as true for clients with $200,000 homes as well as those with $2,000,000+ mansions.

How not be become house poor

For those purchasing a new home, don’t buy more house than you can afford to maintain. That means going in with a realistic estimate of ongoing costs and repairs. We routinely advise clients to set aside 1-2% of their house value per year to cover routine maintenance and repairs. Test this out on your budget before buying.

If the house you’re buying (or already live in) needs upgrades, work out the estimated costs – then double them. It’s our unfortunate (and personal!) experience that everyone spends twice as much as they plan to. Ask yourself, if you run over budget, where that money will come from. Are your savings and investment portfolios so robust that they can sustain a ding of that magnitude?

If you are already in your house, calculate how much of your available income is going to keep that roof over your head.  (Hint: most people have absolutely no idea what their house really costs.)  Only you can determine whether it’s worth it, but to make that decision, you need to know exactly what it costs and then rank your priorities (e.g. new air conditioner, or trip to Machu Picchu?).

Check out the alternatives. The first thing I suggest to clients contemplating a change is that they take a look to see what’s out there.  Check out, drive through neighborhoods, or talk to your realtor. Get a realistic idea of what your current home may be worth, and what you would need to pay to get a new place you could be happy in.  After all, you might be living there a long time!

Smaller may be better.  For those trying to moderate their expenses in retirement, downsizing homes may be the solution. “Smaller homes typically mean lower taxes, less expensive maintenance and repair, and lower heating and cooling bills,” says Johnson. And in fact, after years of trending upward, the American home may be starting to shrink, as a result of the recession, a desire for greener living, and demographic changes.

Keep in mind that there are many (non-financial) reasons to downsize.  Lately, we have had several clients downsize, not to save money, but to simplify their lives. Once the kids are out of the house, and with a decade or more away from retirement, we’ve found they prefer to focus on other priorities like travel and fitness rather than fixing the sprinklers.




About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!


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