Life Stages: Pre-Retirement

Many longtime homeowners have flirted with the idea of cashing in on their home price appreciation by selling their home, once an appropriate size when there were more bodies in the house, to smaller, less expensive abodes as they approach or enter retirement.

On paper, it seems like an elegant solution. Freeing up some equity to help with sustaining your lifestyle in retirement, not to mention a smaller home to clean and maintain. But there are many financial and non-financial considerations.

What do you do with the money?

If you’ve never invested a large amount of money before, suddenly having a large pot of money can be a daunting thing. Leave it sitting in a bank account and you’ll likely slowly lose purchasing power due to inflation and being fully taxed on interest earned. Leap too quickly into an investment strategy you aren’t familiar with and you might get spooked and react with fear if you see a big dip in the value of your portfolio. While many investors know you’re supposed to “buy low, sell high”, reacting with fear makes it easy to “buy high, sell low”. Before you start investing, it’s imperative to take some time to learn about the basics of investing. Whether you choose to do-it-yourself or use one of the various types of financial advice available, you can’t delegate all responsibility to someone else. You need to educate yourself on at least the basics.

The costs of downsizing

If you were looking at moving from a $500,000 home to a $400,000 home, don’t expect to free up $100,000. Selling a house comes with realtor fees and other closing costs, and buying the next house will incur land transfer taxes and other closing costs. That $100,000 could get cut in half in extreme cases. You’ll want to consider if moving from your home to only a slighter cheaper home is really worth the compromise compared to the money you will actually free up. The financial benefits of the downsizing may only make sense if the downsizing is at least a little aggressive. A minor step down may actually set you back financially. Do some serious research into all the costs of moving.

If you are looking at selling your home and renting, then you have all the considerations of dealing with a landlord, and all landlords are not created equal. There is no guarantee you’ll get along, you might not be able to customize your home in the way that you would like, and there’s the chance that you’ll be moving sooner than you might expect (or not soon enough).

The non-financial considerations

Depending on how long you lived in your home, it can be emotionally difficult to move. Not only that, housing all your contents into a smaller space may require letting go of possessions and memories. If you move to be closer to where your children have decided to put down roots, think about what would happen if those roots weren’t too strong and the kids move elsewhere, leaving you somewhere that is now not ideal for you, or facing the prospect of moving again. You should also think about the physical type of home that would be more suited to you as you age. Some people see lots of stairs as a great way to stay active, others see it as restrictive or dangerous. And finally, think about your social networks. Not Facebook, but your actual real-life social networks and the people you see face-to-face. If you have no problems making new friends, it may not be an issue, but there is the comfort of having friends nearby that is hard to put a value on.