Why Your 40s Can Be a Good Time to Downsize Your Home

When you think about how you want to spend the second half of your life, where does your home fit in? It’s a difficult question, right?

Most of us, I would imagine, have bought into the idea of the American dream. You know, the idea that owning a home is one of our life goals. The idea that being a homeowner means we have succeeded in our career and are on the right path.

Many people still consider their home their greatest asset. However, after the financial downturn in 2008, this idea is being questioned by some

Whatever your perspective may be, have you given any thought to the advantages or the downsides of downsizing your home as a way of preparing for the second half of life?  

What are the pros and cons for you?

Here are some key points to consider.

If you’re looking to improve your financial position and you have too much house, downsizing is a great option, Sass said. This could apply to people who started their family at a young age and the kids are no longer living at home. Or it could even apply to people with children still at home who stretched the limits of their budget to buy a large home with a mortgage that’s unmanageable or expenses — such as utilities and maintenance — that are more than anticipated.

If you have little to no savings and know retirement will be a stretch, downsizing might be essential, Arzaga said.

It also can be a good option for people who are willing to sacrifice some space for a smaller home or rental unit closer to recreational activities they enjoy or their workplace, Sass said. You just want to make sure you move into a house that will suit your needs as you age, such as one that’s a single floor or has a master bedroom on the first floor. Because Sass said moving gets harder physically and emotionally as you age, downsizing in your 40s can make the transition a little easier by taking advantage of your younger age to make a move that you know you’ll eventually need to make. 

In Your 40s, you might be thinking more about expanding your current house or moving to a bigger one if you have children living at home. Each kid wants his or her own room, plus you want a big bonus room where they can hang out with their friends and more room so you can entertain guests, right? Downsizing is the last thing on your mind.

However, when people typically start thinking more seriously in their 50s about what they need to do to be able to retire and start considering downsizing as an option, they’re really not giving themselves much time to reap the benefits of moving to a less-expensive home or renting, Arzaga said. The reason 40 is better than 50 is you have another 10 years to boost retirement contributions with the savings from downsizing and more time for your investments to grow, he said.

For example, if you downsize from a $250,000 house to a house that costs $150,000 and factor out the costs of selling and moving (10 percent of the selling price), you’ll have $75,000 that can be added to savings, according to the Center for Retirement Research’s “Using Your House for Income in Retirement” report. If you make this move in retirement, you can increase your yearly income in retirement by $3,000 if you withdraw 4 percent of the $75,000 annually, according to center calculations.

If you downsize in your 40s, however, and invest that $75,000 in a portfolio with a mix of stocks and bonds with a 6.5 percent annual rate of return, it could grow to nearly $250,000 over 20 years. Downsizing in your 40s and investing the difference in house prices can significantly boost your retirement savings and the amount you can withdraw in retirement, said Steven Sass, an economist with the center and author of “Using Your House for Income in Retirement.”

You also can factor in savings from the lower cost of taxes, insurance, upkeep and utilities — which run about 3.25 percent of the value of house. Those expenses will drop from about $8,125 a year with a $250,000 home to about $4,875 with a $150,000 home — freeing up $3,250 you also can add to savings, according to center calculations. You can run your own numbers using the center’s calculator.

If you did the math, Arzaga said, you’d find that the benefit would be even bigger if you downsized before 40 or avoided homeownership and just rented. But many people are just starting families and buying homes in their 30s. And he recognizes that you can’t take away the need people have for homeownership. “It goes against the dream of what people feel they should do,” he said. That’s why it’s more realistic consider downsizing in your 40s than an even earlier age. 

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