Is it time to downsize?
The choice of where to live in retirement is perhaps one of the most daunting decisions many retirees have to make. When your home location is no longer dictated by the demands of a job, you can live anywhere you want, at least in theory. Practically speaking, there are many issues you need to consider.
While some people choose to stay put in the family home, empty nesters who decide they want to downsize have a number of options – buying a condo or a smaller home, or renting an apartment. There are strong arguments in favour of renting at this stage of life.
While younger people are often advised to buy a home in order to build up equity and invest for the future, for the retiree, the future is now. Selling a principal residence, investing the tax-free proceeds, and using a portion of the income to cover rent payments has many advantages once you reach retirement age. Rental accommodation can provide a carefree lifestyle, without the shared ownership drawbacks of condo living. All maintenance concerns, even many of those related to the individual unit, are taken care of by building management. If your needs change, it’s relatively easy and inexpensive to move to a new location, compared to selling a property.
To evaluate the financial benefits of selling your current home and moving to rental accommodation, you need to consider the capital that can be freed up by the sale of the home, and calculate the expected after-tax return on investment. For example, Steve and Maria believe they could net $760,000 on the sale of their home, after real estate commissions, legal fees, and moving expenses. Assuming this capital earns a 5% rate of return, they would receive an annual gross income of $38,000. Depending on their tax bracket, they might be left with $20,000 to $25,000 after tax.
However, don’t forget that Steve and Maria incur many expenses related to maintaining their large home. They estimate they spend about $15,000 per year on property tax, insurance, maintenance and utilities. In total, this gives them $35,000 to $40,000 per year that can be applied towards their housing budget. If they find they don’t need to spend that much for suitable rental accommodation, they can use the extra dollars for travel or otherwise enhancing their lifestyle.
If this is a decision you’ll be facing in the near future, don’t hesitate to give us a call – we’ll be glad to help you crunch the numbers.
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