Downsizing from the big house to a smaller townhouse, condominium or apartment is becoming increasingly common today as baby boomers age and move into the retirement phase of their lives.
“We certainly are seeing a lot more people retiring who realize that they don’t need their big house anymore,” says Gerry O’Brien, an adviser with Sun Life Financial in St. John’s, NL. “There are basically two reasons why people do this. They want to sell to get money to sustain their lifestyle in retirement, and for practicality: They don’t want the work and responsibility of looking after a home, for health reasons, they want to move closer to family or because of the death of a spouse.”
Money is a real concern for many retiring/retired Canadians. A study by Sun Life has found that 25 per cent of retirees are carrying non-mortgage debt from month to month and are still making mortgage payments on their homes. Twenty-two per cent of Canadians 55 to 65, 16 per cent between 66 and 69, 23 per cent between 70 and 74 and 17 per cent between 75 and 80 continue to make mortgage payments on their homes.
Besides owing money on their mortgages, 66 per cent have miscellaneous credit card debt, 26 per cent are making car payments, seven per cent are paying down health expenses, seven per cent paying for holiday expense or a vacation property, and six per cent are paying off home renovations.
While downsizing may seem to be a financial windfall, O’Brien cautions it might not be as good as it seems.
There are costs associated with selling and purchasing, including real estate commissions, legal fees and moving, renovation and redecorating expenses that can run anywhere from 10 to 20 per cent of the gain. Suddenly the $200,000 you think get from selling a $500,000 house and buying a $300,000 condo could be significantly less than what you thought.
Then there is the possibility that the extra money that comes from selling could increase your income which could affect your income taxes and eligibility for and collection of government retirement programs such as the Old Age Security (OAS). OAS payments begin to be clawed back when gross taxable income exceeds $75,000.
If you have contribution room, you could put money into your RRSP, but that too becomes taxable when it is withdrawn.
“It really makes sense to sit down with a financial adviser to go through the costs associated with a move, do a budget and see how the extra money will affect your taxes and income,” O’Brien says.
Another option is to rent a place to live rather than buy. O’Brien says about half of downsizers are OK with renting but the other half prefer to buy because they still want to own property that they can pass on to their family or loved ones.
Downsizers may want to take the proceeds, invest the money and try and live off the interest. However, O’Brien notes that condo fees and expenses often can be almost as high as the costs of owning a house.
Some downsizers may be attracted to the idea of an easier lifestyle associated with a condominium and/or apartment. Condos often are appealing for those with health concerns because they are low in maintenance and easier to navigate and travel buffs might opt for rental accommodation with no worries about home security when leaving town.
However, sometimes when they actually get there they don’t like living in a more communal setting and in smaller spaces. O’Brien suggests doing a trial run – renting for a while in a building or condominium to see if you like it, and then buy if you want.
Even if downsizing is years away, it’s important to think about all of the factors that can affect your decision and to maintain an open dialogue with your loved ones. Being proactive can help you remain in control rather than having to deal with an unexpected move when you’re not prepared.
Given the current debt situation of many retirees and near retirees, finances often can be the determining factor in the decision to downsize, but lifestyle considerations can be equally important. So examine your goals and the range of possibilities and seek professional advice to understand all the financial implications.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.