The perils of downsizing
According to a recent BMO poll, 40 per cent of Canadians haven’t saved a dime for retirement. This is a staggering figure and I doubt that many (any?) will be able to manage on CPP and OAS when the time comes.
Frankly, I’m guessing that the majority of non-savers are depending on the Canadian retirement fund of last resort — downsizing. And it has worked during this past decade of real estate strength. But pay attention to these seven pitfalls before downsizing becomes your retirement plan.
1. The pot of gold shrinks.
Many are over-optimistic about what their house is worth, while underestimating the cost of new quarters. From realtor and lawyer fees to moving and redecorating, the equity in one’s home can be nibbled away by one-time and on-going expenses.
Condos are an option for downsizing but all the same costs exist plus condo and often parking fees.
2. The bank wants its share.
TD’s 2013 Retirement Realities Poll indicated that 39 per cent of Canadians expect to have debt in retirement. By far the majority of them will have mortgage or home equity lines of credit debt. Homeowners with reduced income in retirement may find it difficult to secure a mortgage on a new property. So plans to carry a mortgage, while using the equity from the former home as cash flow, could go out the window.
3. Windfall temptations.
There’s a terrible temptation after downsizing to spend. After all, doesn’t it make sense to have a new car and appliances for a worry-free retirement? Or perhaps you’ve been working so hard there has been no chance to enjoy life. Devoting a little of that home equity cash to travel is what you deserve, right?
And don’t get me started on the kids. You might be tempted to help them eliminate their student loan or buy their first home with that extra money on hand.
4. Investment temptations.
I think brokers and mutual fund salespeople invented downsizing because it’s a great source of revenue for them. It is all too easy for advisers to argue that some of the downsizing funds should be devoted to investing in order to catch up on returns.
Those who were talked into investing after downsizing ten years ago are still trying to break even after the market crash of 2008/2009.
5. Downsizing is a life change.
Inherent in the idea of downsizing is that you’re moving to something or somewhere different.
The new abode may be smaller or in a less desirable area. The neighbourhood and shopping districts may not be familiar or comfortable. Distance from friends and family may be greater thus reducing the frequency of visits.
You may not have a yard for the dog. This can be a big life change for those accustomed to letting Fido out first thing rather than hauling on outdoor gear for the morning and late evening eliminations.
For some, gardening is an annual chore, but for many older people it is a constant joy. A few hanging baskets isn’t the same as flowerbeds and a vegetable patch.
6. Moving is moving.
It is a huge ordeal to pack up your nest especially if it involves sifting through decades of accumulated belongings and memorabilia. A few generations ago, many older people died in homes they had lived in their entire lives, leaving the family to take care of all their stuff.
But with family spread out and offspring living in smaller homes, the chucking out and sorting chore can be murder emotionally and physically.
7. Moving gets harder with age.
Familiarity is everything as we get older. It serves as a gentle prompt to memory while helping us feel good generally. Changing routines can disorient even the sharpest senior.
I saw how important familiarity is when my parents moved from British Columbia to Ontario in order to be close to family. Suddenly my father couldn’t find his way around. He’d get lost driving a few blocks to the store and could rarely find his way home after walking the dog.
My mother never adjusted to a different kitchen and a tiny yard.
Downsizing may well be financial salvation for those who haven’t saved enough for retirement. According to a 2013 Royal LePage Real Estate survey, fully 60 per cent of Canadians are planning on doing just that, either because they must or because they feel it is the right thing for their retirement.
Think carefully about the implications — financial, physical and emotional. And if downsizing is in your plans, do it sooner rather than later.