Smaller Home Can Boost Your Retirement Income

Last Updated Oct 10, 2010 7:59 PM EDT

If you're concerned about having enough income for a comfortable retirement, consider downsizing your home. A smaller home can boost your retirement income.

Let's consider a basic example where you own a $525,000 home and are considering downsizing to a $300,000 home.

As I wrote about recently, houses are an expense (see Housing: Don't Confuse an Expense With an Investment). They consume cash in retirement, not produce it. And you can figure on it costing about 3% of the value of your home each year to pay the taxes on it, insure it, repair it and maintain it. On a $525,000 house, you're looking at about $15,000 a year to carry the house.

Let's say you decide to downsize to a $300,000 house. Assuming the same 3% cost to maintain it, you're now looking at $9,000 a year; a savings of $6,000, or $500 a month. But that's not the end of the story.

Assume that after closing costs, you netted $500,000 on your home. Since you bought the new home for $300,00, you've got $200,000 available to invest for your retirement. On that $200,000, you can estimate an annual retirement income distribution of somewhere between 4% and 5%, depending on how the markets do. So that $200,000 will produce somewhere between $8,000 and $10,000 of additional income. If your retirement lasts 25 years, that's another $350,000 to $400,000 of income. Those are big numbers.

Of course, this isn't the greatest time to sell a home, but it's a great time to buy one. So on balance, you may not get premium pricing for your big home, but you won't have to pay a premium price for the smaller home you buy either.

You can always put the big house on the market and see what happens. Real estate is still all about location, and if you've got a nice house in a good neighborhood, you might do better than you expect. If you don't get a buyer at a reasonable price, then it hasn't cost you anything.

  • If you're nearing retirement and are concerned about having enough income, this may be a strategy you need to pursue even though the housing market is lousy.
What if you're not retired yet. Does it still make sense to downsize? Well, downsizing today can not only boost your income in retirement, but it can help you accumulate more money for retirement. If you downsize, then the money you're saving in annual maintenance costs and the lower mortgage payment can all be directed to your retirement plan. This extra cash will help build a bigger pool of assets to produce more income in retirement. And since your housing expenses will be less when you retire, it's a double benefit.

Bottom line. Downsizing to a smaller house will boost your retirement income.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.