Housing is an overlooked aspect of a comprehensive retirement plan. After all, you’ve spent years paying down a mortgage and building equity in your home. From a financial aspect, your house likely makes up a sizable portion of your net worth. But there are other reasons to create a housing plan as part of your retirement strategy, including your social and physical needs which are supported by your housing decisions. 

In this article, we will explore one possible housing decision—downsizing—and whether or not you should consider it as part of your retirement plan.

Financial reasons

1. To pay off a mortgage.

The first reason to consider downsizing is to pay off an existing mortgage. Bringing a mortgage into retirement is more common than you think. Forty-six percent of adults aged 65-79 have mortgage debt, with an average balance of $77,000. Thirty years ago, only 24% had mortgage debt.

Yes, mortgage rates have fallen sharply in the last 30 years, making the cost of carrying this debt more affordable. However, getting rid of a mortgage in retirement isn’t as much about the interest rate as it is about freeing up a monthly expense.

As a retiree, you need to manage withdrawals from your investment portfolios. These withdrawals are what supplement your social security and allow you to pay for your lifestyle. What if you retired right before or during a recession or a weak stock market? Taking withdrawals out of your investments at the same time you’re experiencing bad returns is a “one-two punch” for your nest egg. In retirement income planning, this is called sequence of returns risk and it heightens the probability of running out of money later in life—even if the market recovers.

One option to combat this risk is decreasing monthly expenses for a period of time. Looking at your budget, what expenses can you cut? Sure, you can likely find small luxuries here and there, but will they really move the needle? This is where eliminating a mortgage payment has a positive effect. A mortgage is a large, fixed monthly expense that makes your budget less flexible. This puts you at risk if you experience bad market returns early in retirement. Downsizing and getting rid of this monthly expense can be a great way to preserve assets from your nest egg.

However, if your retirement income consists of guaranteed income like social security, pensions, and annuities, you’ll have a much easier time deciding if you want to carry a mortgage. Managing withdrawals from investment portfolios isn’t an issue as your income is on autopilot.

2. To tap into equity.

The second reason to downsize is to tap into your home’s equity. The value of your home can make up a sizable portion of your net worth. Unfortunately, it’s a “dead” asset. Unlike your bank or investment accounts, you can’t easily access money tied up in your house.

If tapping into the equity in your house would give you better retirement outcomes, what are your options for accessing it?  

    • Get a mortgage or home equity loan. You’ll increase your monthly expenses with the added loan, so this isn’t a great option.
    • Sell your house and rent. This can be a good option for some. However, having a rent payment increases monthly expenses.
    • Get a reverse mortgage. This is an overlooked option and can get rid of an existing mortgage and/or give you a growing line of credit. Plus, it doesn’t have to increase your monthly expenses since loan payments aren’t required.
    • Sell your house and buy a smaller one (downsize). Downsizing allows you to capture the leftover equity after purchasing your new house, making this a great option to increase your liquid assets while keeping a house of your own. Want to get even more equity? Consider a reverse mortgage on your new house.

3. To lower monthly bills.

In addition to eliminating a mortgage, downsizing can also lower other monthly housing expenses. Often a smaller house means lower utility and insurance costs. Moving out of state? Check the area’s property taxes to see how they compare.

The social and physical reasons

It would be a mistake to assume downsizing is a purely financial decision. Where you choose to live is a primary driver of your quality of life. Consider these social and physical reasons for downsizing:

  • Less home maintenance
  • The opportunity to declutter
  • Buy a vacation home
  • Move to an active community for retirees
  • Be closer to family

Are retirees downsizing? You may be surprised.

If a future downsize is part of your retirement plan, look at the data. A study of retirees has shown many didn’t downsize, even though it was their original plan. In another study, 76% of adults aged 50 and older want to stay in their home through retirement. The idea of downsizing is not a foregone conclusion. Most people like their homes.

Whether you want to stay in your current home or move to a place better suited for your lifestyle, it’s important to have a plan for housing in retirement. This includes ways to eliminate a mortgage, access equity, or align your housing with your social and physical needs.

Schedule an appointment to make a comprehensive retirement plan—one that includes a plan for your home!