For older people in America who’ve witnessed their retirement savings shrink over the last couple of years, downsizing will seem like a no-brainer. Wouldn’t going to a smaller house mean lower living costs and mortgage payments? Well, perhaps — however, professionals agree that a variety of factors, not all of them being financial, make every case unique.
Downsizing from a $250,000 home to one which costs $150,000 on average, could increase year-to-year income by $3,000 and decrease annual costs by $3,250, and save the homeowner $6,250 per year, according to the research by the Center.
Here is the math behind these numbers: Subtracting the cost of the new house from that of the old house will add $100,000 to your savings. From this, subtract the price of selling your house then moving.
Therefore, 10 percent of $250,000, or $25,000, will bring the profit down to $75,000. Utilizing the rule of 4 percent, a general rule of thumb that financial planners utilize to figure out how much retirees might safely withdraw from their savings per year, experts say $75,000 inside the bank might add $3,000 of income a year.
The Center figures out the price of insurance, taxes, upkeep and utilities at 3.25 percent of the value of the home — a number that also will vary depending on where you reside.
At this rate, household costs for the old house would be around $8,125 per year. For the smaller, new house, they’ll drop to around $4,875 per year — which results in an extra gain of $3,250 per year for an overall yearly savings of $6,250.
But, experts emphasize that this example is only hypothetical. Figuring out the costs rarely is that straightforward.
Plus, the rule of 4 percent has been recently challenged by financial specialists, which complicates the issue even further. The quantity a retiree may withdraw from savings without any risk per year might be smaller.