Do Homework Before Downsizing Home For Retirement

Downsizing is a common ingredient given for retirement recipes.

Selling a home and moving to a smaller one can be a good a way to cut costs and shed responsibilities, like maintenance.

But there's a right way and a wrong way to downsize. "If you don't do your homework beforehand, downsizing may not make sense," said John Nersesian, managing director of wealth management services at Nuveen Investments.

Your goal should be to determine if your net proceeds from selling your home are big enough to pay for certain expenses in retirement.

"People tend to overestimate the financial benefit of selling their preretirement home," Nersesian said.

Prior to putting your home on the market and starting to shop for a smaller replacement, do some arithmetic. Suppose realtors tell you that $600,000 is a realistic selling price for your home, which you bought for $400,000.

But before you start dreaming up ways to spend that $200,000 gross gain, here's how that amount is likely to be whittled down.

Paying off your utilities like water and sewerage, plus various closing costs, commissions, escrow and title insurance will typically cost you 6% to 8%. That could cut your proceeds to $552,000.

You also must deal with prorated property taxes. A typical 2% levy on $600,000 is $12,000. If your sale is, say, in midyear, that cuts your net proceeds to $546,000.

Suppose you still owe your mortgage lender $100,000. Paying that off slices your net proceeds to $446,000, not much more than you paid in the first place.

If you paid for repairs to boost your home's salability, that's yet another cost.

Buying Costs

And you still must deal with the expenses of relocation and buying a replacement home.

Closing costs on this end could add 3% to the price tag. On, say, a $300,000 condo, that's an extra $9,000. Moving from New Jersey to Florida could run $5,000 or more. A new mortgage is still more money.

"The point is that your net gain might be much less than you expect," Nersesian said.

Whatever it amounts to, you need to plan on making it last a long time -- perhaps 20 to 30 years. Many people do that by withdrawing just 4% a year from their nest egg.

"If your entire nest egg consists just of what's left over from selling one home and buying another, in this example it could be closer to $100,00 or $200,000 than the original $600,000 gross proceeds," said Evan Welch, partner and chief investment officer of Antaeus Wealth Advisors in Boxborough, Mass.

That translates into as little as $4,000 in the first year, much less than the $24,000 some people actually assume in a scenario like this, Welch says.

A move from the North to the South can cut your heating bills. But it can boost your air-conditioning costs. And it can mean new condominium fees.

"It can also mean more expense and even inconvenience in traveling to see friends and family," Welch said.

Don't wait until the last minute.

Start talking with real estate brokers and lenders well before you pull any triggers. Get a handle on as many of the costs as you can. Plugging the numbers into a spreadsheet will make it easier to do various what-if scenarios.

"You also need to make sure that the lifestyle changes suit your needs too," Welch said. "If you're unhappy, it doesn't matter if the numbers make sense."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.