Data Shows Downsizing Costs Seniors More

Downsizing might not be such an economical resource for seniors to increase retirement savings. 

While the assumption of downsizing is thought to reduce overall living costs, a report from Go Banking Rates (GBR) encourages prospective retirees to first do the math, because they could end up paying more. 

On the surface, empty nesters and retirees can count the potential savings from downsizing. A smaller home is usually a less expensive home as fewer square footage offers less utility costs, which GBR suggests also costs less to maintain than larger homes. 

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But while the benefits seem good in theory, in practice there are a variety of expenses many do not consider when purchasing a new home.

A home hit hard by the housing market crisis could be worth significantly less than when it was purchased. Although homeowners can sell and use the proceeds toward a less expensive home, the savings are offset by the loss on the home’s original purchase price.

Realtor fees to find a new home and sell the original also cuts into expenses, as well as closing costs and fees downsizers must pay in securing new mortgage terms for newer residences.

To avoid expenses such as these from tearing into savings, the study suggests renting as a viable, more cost-effective avenue for retirees and empty nesters looking to move. 

After factoring in costs associated with insurance, repairs, mortgage payments and taxes, renting appears much less costly in the desire to downsize than buying a smaller home.

Rather than playing into assumptions, the study urges seniors to look at all the expenses attached to moving and purchasing a smaller, more cost-effective home. 

Written by Jason Oliva

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  • While the article was interesting and made some good points, it also was rather inane and misleading. It was absolutely correct in saying one must do some old fashioned arithmetic but it also stated:

    “If your local housing market was hit hard by the mortgage crisis, your home could be worth significantly less today than when you purchased it. Though you can sell and use the proceeds to buy a cheaper house, resulting in thousands of dollars left over to spend as you wish, those savings are largely offset by the loss you’d take on the original purchase.”

    So what if you bought the home at a higher price? That is simply “historical cost” used for purposes of computing income tax gain or loss. Hanging onto anything just because the value has dropped below its purchase price is economic suicide; in economics such losses are embodied in the concept of “sunk costs.”

    It could be that based on market conditions the value of the new home (even if its current value is lower than that of the existing home) might rise in total dollar value faster than the value of the existing home. What does original cost have to do with making decisions now unless income tax is a significant factor which it would not likely be in this case.

    While the article seems all right on the surface, at its core, the writer is poorly educated on economic decision making. If you take the sunk cost issue out of the article, it is OK but unfortunately because it is there, the article can best be described as misleading.

    You can find the article at: http://www.gobankingrates.com/mortgage-rates/downsizing-home-cut-living-expenses-mortgage-loan-payment-empty-nesters/#ixzz2K42bwmIt

  • And so where is the senior to find this affordable rental property ? Seniors typically need single story homes, located at ground level – not necessarily available in all parts of the country. Seniors also need companionship. How does one find an appropriate home at an affordable price. Most retirement specific developments are very very expensive.

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