May 17

11 Financial Benefits of Downsizing for Baby Boomers and Empty Nesters

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As the sunset years approach, many baby boomers and empty nesters are exploring downsizing as a smart financial strategy.

By trading a larger home for a smaller one, they unlock numerous financial benefits that can bolster retirement income and simplify lifestyle.

This page explores the 11 key financial benefits of downsizing.

1. Reduced Mortgage Payments or Mortgage-Free Living

mortgage payoff happy empty nester

For many, the American dream of owning a home free and clear becomes more attainable when downsizing.

As you transition from a larger family home to a smaller one, the equity you've built up over years of mortgage payments can now work in your favor.

Let's consider the numbers: according to a report from the National Association of Realtors, the median sales price for a single-family home in the U.S. as of 2020 was around $300,000.

If you're selling a larger home in a desirable area, you could be looking at a much higher selling price.

Now, let's say you've been diligent with your payments over the years and have only a small outstanding balance on your mortgage.

The proceeds from your home sale could cover this balance and leave a substantial amount for the purchase of a smaller home.

If the price of your new, smaller home is less than what you net from your home sale, you could even become mortgage-free instantly.

The implications of this are significant.

Mortgage payments are often the single largest monthly expense for households. 

Eliminating this can free up a large portion of your income, reducing financial stress, and providing additional funds that can be allocated towards enjoying your retirement, investing, or saving.

At the same time, it's crucial to understand that real estate markets can vary greatly by location.

The amount of equity available to you will depend on the value of your current home and the cost of homes in the area you're considering moving to.

2. Lower Property Taxes

lower property taxes when downsizing

A smaller home generally has a lower assessed value, which is the basis for determining property taxes. 

This can result in significant annual savings.

For instance, if you downsize from a home valued at $400,000 to one valued at $200,000, and your local property tax rate is 2%, you could potentially reduce your yearly property tax bill by $4,000.

Keep in mind, however, that property tax rates can vary by location, and other factors can also affect your property tax bill, such as changes in tax laws or assessments.

3. Decreased Utility Bills

save on utility bill when downsizing

A smaller home typically requires less energy to heat and cool, which can result in substantial savings on your utility bills.

According to the U.S. Energy Information Administration, heating and cooling account for about half of the energy use in a typical U.S. home, making it the largest energy expense for most homes. 

By downsizing, you could significantly reduce this cost, leaving more money in your pocket for other expenses.

4. Lower Maintenance Costs

lower maintenance costs

Maintenance, repairs, and improvements can eat up a significant portion of your budget in a larger home. 

These costs include regular tasks like lawn care, as well as periodic expenses like roof replacement or exterior painting.

According to Angie's 2020 State of Home Spending Report, homeowners spent an average of $2,467 on home maintenance in 2022.

By downsizing, you could potentially cut this cost by half or more, depending on the size and condition of your new home.

5. Reduced Home Insurance Premiums

Lower home insurance rates when downsizing

Your home's size and value are key factors that insurance companies consider when setting your premiums.

By downsizing to a smaller, less expensive home, you could potentially lower your home insurance premiums, resulting in additional savings each year.

6. Increased Cash Flow

The savings from reduced mortgage payments, property taxes, utility bills, maintenance costs, and home insurance premiums can significantly increase your cash flow. 

This provides more funds for investing or other expenses, ensuring a comfortable retirement.

7. Lump Sum from Sale

Large home equity when selling home

If you've built significant equity in your current home, selling it and buying a less expensive one could provide a substantial lump sum.

This money could be invested to generate additional income, or used to fund expenses like travel, hobbies, or used to fund your bucket list adventures.

8. Potential for Rental Income

Rental income when buying multi-family home

If you downsize to a multi-unit property, like a duplex, you could live in one unit and rent out the other. 

According to the Zillow, the median monthly rent for a rental unit in Tampa was $2,335 in 2022. 

This could provide a significant, steady income stream to supplement your retirement income.

9. Less Temptation for Unnecessary Purchases

Minimalism when downsizing

A smaller home leaves less room for non-essential items, potentially curbing spending on home furnishings and decorations.

This can result in significant savings over time, especially if you tend to make impulse purchases.

10. Increased Home Equity

Increased home equity

If you downsize and use the proceeds from your previous home sale to pay for your new home in full, you can immediately build substantial equity in your new property.

This could provide a significant financial cushion and increase your net worth.

11. Funds for Retirement or Other Goals

funds to travel during retirement

The money saved and earned from downsizing can be used to bolster your retirement savings, fund travels, contribute to grandchildren's college funds, or pursue other financial goals. 

By reducing your living expenses, you can free up funds to use for things that truly matter to you.

Final Thoughts

While downsizing has many potential financial benefits, it's a major decision that involves certain costs and lifestyle changes.

It's always wise to consult with a financial advisor or real estate professional to ensure it's the right move for your specific circumstances.


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