Introduction to The House Downsizing Decision Tree
?Introduction:
?Often households nearing retirement find they do not have enough liquid assets to sustain themselves for the long-term. One potential choice for some of these households is to downsize to a smaller home and eliminate existing debt.
?A financial advisor or realtor attempting to advise clients on whether to downsize or stay in their current residence needs to provide information on four issues – (1) the financial sustainability of the current living arrangement, (2) potential addition in liquid wealth from downsizing, (3 impact of downsizing on financial strategy and overall financial security, and (4) the timing of the downsizing decision.
?Financial sustainability involves the question of whether a retiree with their current home, mortgage, and liquid financial wealth can remain in their residence without outliving their retirement resources.
?The estimate of additional liquid financial wealth from downsizing after the elimination of mortgage debt and the purchase of a replacement home is a relatively straight forward calculation.? The first objectives of the additional financial wealth are to increase resources available for consumption in retirement and to reduce the likelihood a person will outlive their retirement resources.
?The additional financial resources obtained from the downsizing allows many retirees to pursue other financial objectives, which will further enhance financial security during retirement.? These objectives include:
·????? delay in claiming Social Security benefits to obtain higher Social Security benefits,
·????? delay in the disbursement in retirement plan assets to take additional advantage of tax deferral and increase wealth in retirement plans,
·????? the conversion of traditional retirement assets to Roth asset to lower the amount of tax paid and to increase funds for spending in retirement years.
?These additional financial maneuvers, which often can only be achieved after an infusion of cash from the downsizing, can substantially improve financial security in retirement.
?The issue of the timing of the downsizing decision involves the choice between downsizing now or downsizing in the future after real estate prices have changed and the outstanding balance on the mortgage has been further reduced.
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?The memo outline the information needed to make informed decisions about whether it is necessary to downsize to a smaller home and on how to maximize the potential financial benefits of the downsizing.?
·????? The first stage of the decision process involves obtaining a measurement of financial sustainability if the person stays in their current home.
·????? The second stage of the decision process involves calculating the increase in liquid financial wealth obtainable from downsizing.
·????? The third stage of the decision process is to recalculate financial sustainability after downsizing.
·????? The four stage of the decision process is to list potential financial strategies which become achievable after a house downsizing decision.
·????? The fifth stage of the decision process involves measuring potential improvement in financial security from delaying the decision to downsize.
·????? The sixth stage of the decision process involves comparing benefits from immediate downsizing to benefits from delaying the move.
The full article is available at Financial Decisions, link below.
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