With inflation racing beyond 8% and higher interest rates to cool the US economy, you’ll hear a lot about older Americans becoming asset-rich and cash poor.
If you’re approaching retirement or have just crossed that threshold, this type of social commentary in the media isn’t what you want to hear.
Thankfully, one of the possible solutions is to downsize your home, transforming the value in your current property into savings that can support your retirement lifestyle.
Of course, it doesn’t take an economic hiccup or catastrophe for downsizing to make sense, folks have been doing it for years in the good and bad times.
As an experienced agent in your neighborhood, I’ve worked with clients who have transformed their lives and lived a wonderfully comfortable retirement because they chose to downsize.
If you’re looking at this strategy, I’d love to work with you. While there are great advantages, a few traps can leave you in the same position or worse.
Set out your goals
Decide on the type of lifestyle you want and can afford. It can help determine the right property for you to purchase. For example, if you want to travel, you might be best suited to an apartment or condo that’s easy to lock up and leave.
Use a great accountant
You need to know your numbers. Work with your accountant to ensure the assumed profit you’ll make from selling and moving into a smaller home will deliver sufficient cash for your retirement.
Know market values
Perhaps the most common error is over-estimating your home’s value. Before discussing any numbers and assumptions with your accountant, ask a trusted agent such as myself to give you a price indication for your property. Alternatively, you can hire an independent valuer.
Relying on portals
Don’t self-assess using the market data on the portals. There’s a tendency to make irrelevant comparisons, which causes regret down the track when the numbers don’t stack up.
Your next home
Don’t underestimate the money you’ll need for a smaller home. While values may have peaked with mortgage costs rising, you must research your options thoroughly and include them in your budget. Don’t view this challenge through rose-tinted glasses.
Tax bills
The IRS may not let you escape its clutches. If you’re a couple, you can make a $500,000 profit on a sale before the IRS gets interested. If single, that ceiling is $250,000. But there are a lot of conditions and “what ifs” here. Ask your accountant to step you through these.
Sales costs
Be realistic about how much money it takes to buy and sell property. It can be around 5% of your current property’s value once you’ve paid legal and agent fees, taxes, the removalist’s bill, insurance and so on.