22 Sep In retirement, downsizing isn’t always the answer

Q. When I look at projections for retirement I don’t have enough unless you count my home. How do I decide if I should downsize?

A. Downsizing isn’t always a slam dunk, and it really depends on all the factors in your financial life.

When it comes to successful retirement planning, you need to start with your goals.

Asking yourself questions will give you a clearer picture of what’s important to you, said Jill Williams, senior financial planner with MetLife Premier Client Group in Montclair.

“You’ll know what the financial requirements — cash flow — are to not only retire, but be able to stay retired,” Williams said.

Ask yourself:
• How many more years do I want to work?
• Where do I want to live?
• I want to work part-time or volunteer?
• Do I want to travel?
• What are my current expenses? How will they change when I’m no longer working?
• What are my contingency plans for aging parents or children who may need to move in?

These are all important considerations, and your choices will be subjective and personal, sometimes trumping logic and economic sense, Williams said.

“When I model financial planning scenarios for clients to compare, with an obvious economic advantage for one over another, a client may still choose against the most economically favorable,” she said. “Why? Because we’re humans with emotional ties to those things we value. A home is one of the most common.”

You need to decide how important your home is to you and where you would go if you downsize.

This is a hard question to answer without understanding your situation and the choices that you have available to you. said Laura Mattia, a certified financial planner with Baron Financial Group in Fair Lawn.

“There seems to be a very dangerous notion that everybody would benefit from downsizing their homes,” Mattia said. “This is not always the best answer financially or emotionally.”

She said she’s seen several couples uproot their dream home only to find themselves in an even worse financial situation and miserable because they miss their old lifestyle.

It seems you’ve decided that downsizing is necessary, but the numbers aren’t everything.

Unless you are independently wealthy and there is significant excess cash, most likely you have been making choices to optimize your happiness all of your life, Mattia said. These choices have included the trade-off between one purchase and another.

She said preparing for retirement is no different, and the choices to maximize your happiness are very personal.

“In other words, what is important to me, is not necessarily important to you,” Mattia said.

That means what your neighbor or your brother-in-law is doing isn’t necessarily the right path for you.

“Most likely some of your choices appear rational to an outsider and some of them may not, and that is okay,” she said. “Remember money is a tool to help us enjoy life. It is not an end goal.”

Now, back to your planning.

Mattia noted you didn’t mention if you have explored all of your options and if you think downsizing is the last resort. To figure that out, you need to decide what you need to enjoy life and how you will prioritize to get there.

For example, she said, have you explored the parameters around your retirement date? What is your ideal retirement date? What is the latest date that you would consider for retirement and still be assured of being personally fulfilled?

If these dates are different, Mattia said, you can create an acceptable range that you can work with. The question boils down to how willing you are to delay retirement beyond your ideal age.

You also need to consider the math, and see how much will be left over after you pay off the mortgage, pay the closing costs and moving costs to a new home.

“Many downsizers find that they need the proceeds to buy a new home and don’t experience the bonanza that they had hoped for,” Mattia said. “Meanwhile, they are living in their second choice.”

If you do decide to downsize, Mattia said you should make certain you don’t buy anything else until your house is sold so you’re not stuck with two houses.

Renting may be another option.

“Many people that downsize decide to move to less expensive areas that appear attractive only to learn later that they are too far from the grandchildren, the settings are too remote and they have no social life,” she said. “Give it a test drive first by renting.”

A move will also change your lifestyle, and you have to decide if you’re prepared.

If you move to a new place and don’t shed your possessions, you may need to pay for storage space, Mattia said. And if you maintain your current lifestyle, the move could result in minimal savings.

Or, your retirement could become more expensive, for example, if you move to a place with a golf membership and clubs.

The point is that you really need to understand the details of your alternative home before determining if it makes both financial and emotional sense.

“The key to a successful life is to spend your time around the things that you enjoy — the things that matter to you,” Mattia said. “Since money is not unlimited, you will need to understand the cost of those things and then you need to prioritize.”

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This story was first posted in September 2015.