Downsizing can be a smart option for anyone who wants to retire soon but lacks the funds to retire comfortably for life.
Is downsizing the right choice to retire earlier for you? The answer depends on your overall wealth plan, cost to downsize, alternatives to downsizing, downsizing calculations and how much it takes for you to live comfortably in retirement.
While downsizing may seem like a simple way to boost retirement savings while also lowering expenses, the magic is in the math coupled with your life and financial priorities.
In this post, we’ll explore downsizing to see if it really is the best alternative to retire earlier.
I write based on my experience from evaluating downsizing after we stumbled into early retirement over a decade ago.
We decided to implement several alternatives to downsizing, instead, but only you can decide what is best for you.
Personal Wealth Plan
Everything begins with your overall wealth plan, whether you want to retire early at 50 or retire early at 62. A lot of people think a wealth plan is about investments only, like stocks and bonds, but a wealth plan is an overall road map.
Since a home is often the largest asset individuals over 50 own, it is probably an important factor in your personal wealth plan.
Click here to read my article entitled How to Create a Wealth Plan.
How Will Downsizing Affect Your Capital?
Be sure you understand how downsizing will affect your net worth. This will be easy to see from your overall wealth plan.
While lower mortgage payments can be alluring, overall debt could be increased from downsizing by locking in another long term loan.
This is because more of your mortgage payments go to interest in the early years of your mortgage, while in the later years your payments go toward your home principal.
On the other hand, paying off your mortgage from downsizing may be your plan so expenses are lower. This can be a good solution but evaluate if this makes the most sense from an overall perspective, especially during times of ultra-low interest rates.
Consider that too much investment capital tied up in home equity could make it hard to build wealth if you use capital that was invested prior to downsizing to buy a cheaper home.
Financing a Downsized Home
One big consideration for downsizing to retire earlier is having to finance two homes.
Unless you have a significant amount of savings available to use for the purchase of the downsizing home, financing may be tricky if you already have an existing mortgage.
Many individuals over 50 have their investment capital tied up in tax favored accounts that could trigger capital gains if it is withdrawn to buy a home.
Alternatives to Downsizing
Many people miss that there are some excellent alternatives to downsizing. While smart and conscious spending is always a priority, there are many other potential opportunities available to retire early that could have better results.
When faced with a big decision it’s helpful to explore alternatives with an open mind. This can be hard since our brains are hardwired for scarcity thinking.
Click here to read my post How to Rewire Your Brain for Success.
What are the alternatives to downsizing?
Here are a few alternatives to downsizing. Some of these ideas may sound impossible or crazy but remember to keep an open mind.
Note: We did many of the things listed below before early retirement, so I know they are doable for normal people.
Over a decade later and many mistakes and successes, our favorite 9 strategies for income producing assets that build wealth are outlined in my eBook here if you’re interested.
- Renting through Airbnb has been an excellent alternative to downsizing for one wealth coaching client who has a detached dwelling.
- Starting one or more income streams from investments such as investing in high dividend stocks or selling covered calls. Here is an article on 44 ways to get more income from investments.
- Starting a small online business before retirement to increase savings and add income in retirement later. Here is my related article How to Choose an Online Business to Start.
- Investing in rental properties. One wealth coaching client bought a home that would work as a primary residence for Plan B just in case he and his wife needed to downsize later. He was able to lease it to the same tenant for years. Since other income producing investments went well, he later sold the Plan B home for a nice capital gain.
- Moving to a higher paying job.
- Starting a consulting business before retiring worked well for one wealth coaching client of mine who wanted to keep working part time after leaving corporate work. Note that B to B (business to business) consulting usually has higher profits than consulting individuals.
- Providing a service on the side, such as photography or website building. Some of the people I hire to do one off jobs for us are employed full time, including our most recent website developer. This has also worked well for a wealth coaching client who wanted to leave her small business employer but keep working part time in retirement.
You can read my post entitled Businesses to Start Later in Life with 115 cool ideas.
Time to Downsize
One of the biggest drawbacks to downsizing is the time and energy it takes to move. If you’re committed to creating income streams as an alternative to downsizing, moving time will be a distraction and it will likely delay your progress significantly.
Plus, people over 50 tend to have fuller homes and closets than younger individuals so moving demands more effort the older you are unless you are very Zen.
And moving is usually stressful.
Many people don’t calculate downsizing costs correctly because it’s easy to overlook expenses and be overly optimistic.
The main thing is to consider all the costs related to selling your home and all the costs with moving into a new home.
Also, assess if there would be certain expenses that would be higher from downsizing, like commuting costs or homeowner’s association.
Remember that real estate marketing material makes the alternatives to your existing home as appealing as possible.
Read my post Is Downsizing Right for Me with more on downsizing calculations.
Here’s my video on downsizing your home. But if you watch it, keep reading to see the others important factors you’ll want to consider to see if downsizing is the right choice for earlier retirement.
Will you be happy in another home, area, state or country?
Proximity to friends and family is an important factor if you’re moving outside of an urban area to lower housing expenses.
And proximity to amenities such as exercise classes or golf courses are also important factors.
Really nail the trade off you’re making to move from a more expensive home to a cheaper home. Is its square footage, location convenience, or an older home?
Once you do this, you can know for sure how you’re compromising.
Real Estate Cycles
One of the main keys to wealth building at Retire Certain is evaluating the overall market before investing in anything.
Is it a good time to downsize based on the current price of your home? In general, downsizing during seller’s markets and up sizing during buyer’s markets has the biggest impact for increasing net worth.
Just like stocks, it’s hard to sell an asset that increases in value year after year for fear of missing out. After several years of a strong increasing market prices, however, easing money out of an expensive asset class can be an excellent wealth building strategy.
Watch my video Wealth Building Strategies That Don’t Take Decades with more about this.
This is true for all types of assets, including stocks and homes.
My CPA likes to make the analogy of selling your home in April during a strong up trending market to going fishing after a good rain: You just drop your pole in the water and the fish strike.
Percentage of Net Worth in Home
Many homeowners over 50 have a large percentage of net worth in a home.
While homes tend to increase in value over the years, this is money that can be used for income producing assets instead of an asset with expenses and no income.
The significance in using this money for wealth building vs being tied up in a home cannot be understated. You can read more about this in my post How Much of Net Worth Should Be in Your House?
Summary for Whether Downsizing Is the Right Choice to Retire Earlier
The process of deciding if downsizing is the right choice to retire earlier for you personally is something that only you can do. This is because no one knows what you most want to have in your life both now and later.
While downsizing calculations are very important and revealing, there is much more to life than your money. While homes are an asset, they greatly influence our quality of life.
And the alternatives to downsizing could lead to even more wealth creation than downsizing your home would do so carefully consider this possibility, too.
Downsizing may not be the best choice for you to retire earlier as many believe or it could be an ideal strategy. It all depends on your life and financial goals.
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Disclaimer: Nothing in this post is meant to be taken as personal financial advice.