Turn Your Empty Nest Into a Nest Egg

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We’d like to think that you can’t put a price on memories, but let’s face it: Sometimes nostalgia can cost you a small fortune. Many retirees postpone downsizing for as long as possible, but they and middle-aged empty-nesters might do better by moving out of that big family-sized home as soon as they can.

Typical downsizers are individuals and couples who no longer need space for children and are fed up with the financial and physical maintenance required by a big home. Moving to a smaller, cheaper place frees up home equity for living expenses and reduces annual housing costs.

But many homeowners wait years for an event to nudge them into downsizing. It could be the retirement of the younger spouse, a health issue that that makes a two-story home impractical, a desire to relocate to a warmer climate, a need to pull cash out of the property or a realization that taxes, maintenance, heating and other costs have grown too big for a fixed income to bear.

Many of these homeowners could have downsized years earlier, like when the last child has left home. Nostalgia and inertia may keep them from doing so long after they may have been able to.

On a purely financial basis, a big, expensive home is generally not the best investment, so it makes sense to get free of one sooner rather than later. While home appreciation varies widely year by year, and from one part of the country to another, the average home grows in value by only 3 to 4% a year over long periods.

That makes the home a poor investment next to stocks, which returned an average of about 10% a year during most of the 20th Century. Because the already modest home price gains are whittled by mortgage interest, real estate taxes, homeowner’s insurance and maintenance costs, even conservative investments like bonds or a laddered series of certificates of deposit might do better. Plus, bank savings and securities are much more accessible.

Imagine a 60-year-old couple who owns a four bedroom house worth $500,000. If the property were to appreciate at 4% a year it would be worth about $740,000 in 10 years.

Suppose the couple sold that house now and spent $300,000 on a smaller place that appreciated at the same rate. After 10 years, it would be worth about $444,000. If the couple invested the remaining $200,000 at a 7% return, it would grow to about $393,000. Together, the home and investments would be worth $837,000 -- or $197,000 more than if the couple had stayed in the bigger home.

If the couple stayed in the bigger home for that period and then downsized, the smaller home would cost $444,000, leaving $296,000 in cash from selling the bigger home. Compare that to the $393,000 that would be in the investment account if the couple had moved 10 years earlier – that extra $97,000 in cash might fund several years of retirement.

Additionally, moving earlier would save on real estate taxes, insurance and maintenance costs. If those totaled 3% of the property value every year, they would come to about $187,000 over 10 years for the bigger home and $112,000 for the smaller one. Add that $75,000 difference to the $97,000 gained from securities investments, and the move to the cheaper home would leave the couple $172,000 richer after 10 years.

It might not be wise to sell a home in today’s depressed housing market, but it could be an excellent time to buy a smaller, less expensive home. In a perfect world, one could buy the cheap home now and rent out one of the two homes until the big property fetches a better price.

Barring that, it would make sense to incorporate a new downsizing strategy into your long-term plans, doing it sooner rather than later.

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