After years of working hard to get to retirement, it’s normal to feel a bit anxious about a change in finances. Your pension or Social Security benefits may not be nearly as much as you made working 40 hours or more a week.
However, chances are you need far less space than you did while raising a family. Downsizing and cashing in some of the equity in your home is financially freeing.
For many baby boomers, their most significant source of wealth is the equity in their homes, which may even exceed their retirement accounts. However, downsizing frees you financially in more ways than just cashing in some equity.
1. Get Rid of Clutter
If you’ve lived in your home for a long time, you’ve likely collected a lot of stuff. Sure, some of it has sentimental value, and you should keep pieces that mean the most to you, or go ahead and hand them down to your children, nieces and nephews. However, sell the rest of your stuff and add the cash to your savings or travel fund. Reduce your accumulated belongings, and see how freeing it is.
2. Lower Your Utility Costs
A smaller place also means you’ll need less energy to run the home, which results in lower utility costs. A smaller yard means less upkeep. No more paying the landscaper to mow your yard every week or spending untold hours and gas doing it yourself.
3. Fulfill Your Dreams
Have you dreamed of living in an upscale area of the city or moving nearer your children and grandchildren? Downsizing doesn’t necessarily mean you’ll spend less on the smaller place. It means you’ll be able to buy the home you want in the area you want. Make sure you crunch all the numbers, including property tax and cost of living in the area. It isn’t financially freeing to move to a new city or part of town, only to discover groceries cost three times as much as where you lived before.
4. Rent out Rooms
Perhaps you love your neighborhood and your home, but you no longer use all the space you have. Another option is to rent out a room or two in your home, which brings in additional finances for your retirement while allowing you to stay in the home you love. The additional income helps cover the cost of home maintenance and gives you a more predictable cost of living than renting, which can increase exponentially if an area goes through a boom.
5. Free up Time
You’ve probably heard the saying, “Time is money.” This maxim is also true in retirement. Downsizing reduces the time you spend cleaning and maintaining your home, and you can invest that time in other pursuits. Perhaps you take up a crafting hobby you always wanted to try, and sell the items you make at weekend flea markets. That boosts your finances in rewarding and profitable ways.
6. Reduce Tax Burden
If you haven’t paid off your home, there is another financial aspect of downsizing. If you pull money out of retirement savings to pay a mortgage, that money is taxable, assuming you have a traditional IRA. Selling a more expensive home and getting rid of that mortgage payment frees up your ability to pull out money in a way that doesn’t increase your tax burden.
Downsizing saves money and allows you to fulfill your retirement bucket list. Financial freedom isn’t always easy to come by, but a little planning and looking at your property as an investment, instead of through the haze of sappy memories, allows you to make smart decisions. Financial freedom in retirement isn’t out of reach, especially if you’ve built up equity in your home.