Ok, this runs a bit against what most people consider main stream financial behavior. But if you will give me just a few minutes, you might find this is a great strategy for you to consider. First, the problem: The American population ages 50 through 65 number about 40 million. The median (median is the point where half of the group are below a certain point and half are above the same point) retirement savings of this group is $15,700.
Yes, that’s right, over 20 million are currently heading toward a funded retirement of less than 5 months and the average 65 year old has about 175 months of life still to live. What options are left at this point?
Let’s consider where a whole bunch of this group is at this stage of their life. Empty nesters. A lot of the expensive hits of raising, educating and marrying off our children is in the past. Most people also reach their maximum earning results between the ages of 58 and 62. This gives us a LOT of potential to work with. Today, I’m going to focus on one of the empty nester’s opportunities. Your home is probably your greatest expense and offers the biggest potential to affect your retirement lifestyle if you choose to take advantage of it. You create two specific situations if you consider DOWNSIZING your home.
First, is lowering your monthly expenses. When you downsize your home, a bunch of your other expenses go down in addition to your mortgage payment; insurance, taxes, utilities and maintenance all go down as the size and value of your dwelling is reduced. It is not uncommon to experience the same reduction in expenses that equal the reduction in value or square footage. For example, a 30% reduction in value and square footage could equal a 30% reduction in expenses associated with your housing cost.
Second, you free up equity and your equity can begin to grow at a much higher rate than that of what most residential homes net. People will argue over this, but the numbers most use are not legit. Take a couple who truthfully tells you that their home has doubled in value in 10 years. That is an average return of 7%, about double the national average of home value increase and very believable in several areas of the United States today.
But here is the rub. That calculation does not take into consideration all the cost associated with this asset over the same period of time. In my area of the county, property taxes run about 3% per year. Insurance runs about 0.75% and maintenance cost from mowing to repairs average another 1.5%. Let’s say you have a 3% mortgage on 50% of your home’s value which equates to another 1.5% cost per year. In the accounting and finance world these are all called “carrying cost”. You could consider these the same as “management fees” for some type of investments.
In the above example, these undeclared cost equal 6.7% annually, over twice the historic annual appreciation of real estate and an actual negative impact of 3.7% per year on their net worth. Even the example couple mentioned above achieved a meager return of less than half a percent per year.
For each $50,000 of equity you free up by downsizing, you have a solid chance of turning it into $100,000 for retirement with only a 6% return over 12 years. With “all in” average housing cost now running slightly above $2,000 per month, a 30% reduction will generate $600 per month in savings. If you combine these two tactics, and achieve a 6% return over a 12 year period, you would have around $225,000 additional funds for your retirement. That could be a game changer.
This option may not be right for you. If you are in this situation, you might consider this type of major action. Please take the time and effort necessary to find good, solid, professional advice to guide you through these decisions. There are a lot of great CPA’s and financial planners who can help you make the best decision for your future. Growing older is tough enough; growing older and poorer is really tough.