Making Cents: Downsizing doesn’t always mean you can down-cost
John P. Napolitano, business columnist for Patriot Ledger.
If you are among the millions who have an extra bedroom or two, the thought of downsizing the home seems to be “the” topic at backyard barbecues. Now that the kids are grown and gone, or almost gone, you may be asking why you should continue to pay the property taxes, heat and other costs associated with maintaining a sizable family home.
Some do have reasons why they plan to maintain the sizable home. These reasons include visitors, including grandchildren on a frequent or lengthy basis. Others include the personal touch and special features that uniquely define who you are.
But for many, the thought of doing it over again, with a home in mind for their current lifestyle desires is quite appealing.
In the course of financial planning for such families, there is frequently an association with lowering your cost of living when it comes to downsizing. The reality, however, is that many end up spending the same amount on a new home. The new home may be smaller, but it is likely to have some of the creature comforts that are impractical in a home raising children. Instead of play rooms and kids bedrooms, you are adding features like ponds, fancy in-home offices, outdoor kitchens and living areas, and media rooms that challenge the look and sound of any first class theaters. And these creature comforts cost a lot more money than the basic and durable areas built for children.
Even if having a house that feels like a resort is not part of your downsizing plan, perhaps that newer simpler home will be accompanies by something in Florida or on Cape Cod? This too can be an unknowing budge buster. Purchasing two homes for the combined cost that equals that sale price of your family home sounds like a plausible way to deploy your sale proceeds. But what may take you by surprise are the maintenance and updating costs to keep both homes up to a standard that you expect at this stage of your life.
The message here is to look at your home as a use asset, and not an asset that is available for retirement. Most financial planners are trained to look at equity value in the home as an asset that is there to be taxed in your estate, but not one that should be relied upon as a way to fund living expenses later in life.
If you are successful at downsizing and down costing, then you may have some extra discretionary cash flow to do other things.
John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at email@example.com or on Facebook as JohnPNapolitano.