Rising Costs of Healthcare
It’s no surprise that health care costs are among the highest most retirees will face, along with housing and transportation.
According to the Fidelity Retiree Health Care Cost Estimate, a couple retiring in 2019 at age 65 could anticipate spending $285,000 over their retirement years on healthcare. It’s a significant number, and it doesn’t include any expenses for long-term care!
Employment benefits aren’t what they were a few decades ago. People retiring today are much less likely to receive solid health care benefits from an employer-sponsored plan. This means healthcare costs will be much higher than they were for retirees in the past.
Inflation on the rise
Another culprit in the higher cost of healthcare is the rate of inflation. Healthcare inflation tends to be even higher than general inflation, meaning your money today will be worth even less in the future when it’s spent on health-related expenses.
In addition, many Americans are choosing to retire at age 62, which is three years before they become eligible to enroll in Medicare. This means they’ll need to cover their healthcare costs on their own, without employer-sponsored coverage or Medicare benefits.
Reasons to Downsize in Retirement
As a strategy for combating the rising costs of healthcare, you may wish to downsize your home. Many retirees choose downsizing because it not only has financial benefits, but can fit better with the lifestyle they want to pursue in retirement
Downsizing, put simply, is moving to a smaller and more economical home. You may have lived in a large family home for many years while building up a career and raising a family.
However, as you approach retirement age, you may find that you no longer require the amount of space you once did. A 3,000-square-foot house with an acre lot may have served you well with young children running around. As you get older and face an empty nest, a large home and yard can become a burden.
Selling your home to move into a smaller place can be a financially wise move for the obvious reason: you should (ideally) make some money from the sale of your home. You should also be able to find a new home with a lower rent or mortgage payment.
It’s important to think through all the potential costs in downsizing, however. For example, selling a home involves expenses. You’ll want to consider realtor fees and closing costs on your current home, as well as expenses of buying or renting a new home.
If you buy again, you’ll need some of your house sale profits for a down payment, inspections, and closing costs on a new place. If your primary motivation for downsizing is money, be sure that your new home makes sense from that standpoint.
Additional Benefits of Downsizing
There are other monetary benefits to downsizing your home in retirement. In addition to the net sale proceeds, you can save money and time on the upkeep of your house. Moving to a house with a smaller yard and lower square footage will decrease the amount of time you’ll have to spend gardening, cleaning, and maintaining your home.
In retirement, you might not have the physical capabilities you once did. So if you stay in a larger home, that means you’ll need to pay to outsource many of those tasks. Rather than spend on these kinds of tasks, by downsizing, you free up more of your retirement income for the lifestyle you want to live.
Moving to a state with a lower cost of living or better tax advantages for retirees may help your financial situation as well. This can help stretch your retirement money further.
As you consider downsizing, you’ll want to think about your mobility. You may be spry and active today at age 65, but in another ten years or more, you may face more aches and pains. In that case, making the switch to a single-story home or an apartment could bring more comfort to your daily life. (Plus, it’ll help prevent injuries since you won’t need to worry about a fall down the stairs.)
Steps to Downsizing
Once you decide that downsizing is the best option for you, it’s key to think about several factors. These are some of the main steps to downsizing:
- Decide what state or city you’d like to move to (consider proximity to loved ones, cost-of-living, and retirement tax benefits.)
- Have your house value assessed to figure out how much you can expect to make from its sale
- Decide how much space you’ll need
- Go through your possessions to determine what you’ll keep, donate, and sell
- Work with a licensed realtor to sell your home
- Hunt for your new home
- Enlist loved ones to assist in the downsizing process
- Enjoy more freedom in your retirement lifestyle!
Some people may wish to stay in their longtime home for as many years as possible. While this is understandably appealing, staying longer may make it more difficult when the time comes to move.
Starting the process of downsizing sooner than you need to is probably a wise decision because it’ll be easier on you physically and emotionally. Moving will require going through a lifetime of possessions, which, unless you’ve been a minimalist, can be quite overwhelming.
Give yourself time to go through all of your possessions before you downsize. It’s painful to let go of memories, but learn to keep what is truly worth keeping, and give away or sell what is not. Try not to put undue pressure on your grown children or grandchildren to take all of the sentimental items you’ve been saving for them.
How Much You Can Save By Downsizing
The money you can save by downsizing will depend on your specific situation.
Let’s imagine you sell your home for $400,000. If you could move to a smaller home that suits your situation and only costs $150,000, you’ll come away with $250,000 to work with. (Be sure to deduct the real estate commissions, closing costs, and any other fees you may incur.)
An additional $250,000 would almost fully fund an average couple’s healthcare costs in retirement. That means you can earmark the rest of your retirement accounts, pensions, and other sources of income for living expenses. What a freeing experience!
Notably, many retirees move to assisted-living communities or others that may come with an HOA or other expenses to factor into their planning. Be sure to run the numbers of various scenarios to determine the best course of action for you.