There are multiple paths to saving for retirement.
Most are at least peripherally aware of the more common retirement income streams of social security and employer-sponsored retirement accounts. If you’re astute you may also be aware of non-employer-sponsored retirement and investment accounts, as well as how real-estate can supplement your golden years.
But, did you know you don’t need to own multiple income properties for you to utilize real-estate in supplementing your retirement income?
Not at all.
All you need is your home.
Tawnya here, and today I’m going to tell you about how you can supplement your retirement by downsizing your home.
You may be wondering how I can know anything about retirement or downsizing, being as I’m 32 and bought my first home just 3 years ago. While I may not have personal experience with either of these concepts, I’m lucky enough to be connected to people who have used this very method to great success for the past 13 years.
My grandparents have downsized twice in the last 13 years, which has allowed them to kill two birds with one stone. First, they have been able to remain in their own home throughout their golden years, and second, they’ve used the profits from each sale to supplement their retirement income.
How did they do it?
Read on to find out.
My grandparents certainly didn’t go into life together thinking they would one day supplement their retirement by downsizing their home.
The very first place my grandparents lived in to begin their married life was a one-room rental with an outhouse.
They’ve come a long way since.
My grandparents moved around a lot throughout their younger years, first because my grandpa was in the Navy and later because of his career. They bought and sold multiple houses, but all the specifics were handled by the company.
That was until 1975, when they settled down in a small town just east of Portland.
My mom was very involved in riding horses when she was younger, and so they looked for a house with some property and a place to keep the horses. The house they bought was a 1,500 sq. ft. tri-level on a little over two acres with a small barn and a few pastures.
They purchased the property for $42,000.
Over the next 30 years they made several major improvements to the home and property that cost them a few pennies, but also added great value. They added a 260 sq. ft. kitchen onto the back of the house, built a 48×48 4-stall barn with a huge shop, added 2,000 sq. ft. of decking and a balcony off the master bedroom, replaced all the fencing, and repainted the house at least 3 times.
The kitchen and barn were contracted out, while the decking, balcony, fencing, and painting was all done by my grandparents.
Fast forward to 2005 and things were changing.
My grandparents were in their mid-70’s. They’d been retired for several years. My grandma was struggling to go up and down the stairs, and my grandpa was struggling to maintain the property.
Thus, my grandparents ended up selling their house in 2005 at the height of the housing market. It was a tough choice for them, and not motivated by money but by the necessity of advancing age.
Their house sold within 3 hours of being on the market, and for $450,000.
They owned it free and clear, meaning after closing costs they pocketed around $425,000. They then turned around and used that money to purchase their first downsize.
A Boring House
Thus, my grandparents made their first move in 30 years to the Boring house (literally in the town of Boring).
This house wasn’t drastically smaller than their tri-level at 1,700 sq. ft., but it was a ranch and sat on about an acre of land. It had a large shop with plenty of room to store their items, plus enough space to give them a sense of the country.
My grandparents purchased the Boring house for $360,000 in 2005 and paid cash, which meant they were able to pocket around $65,000 to supplement their retirement.
They didn’t have nearly as many renovations with the Boring house as they did the tri-level, but then again, they weren’t there nearly as long. They did renovate both bathrooms, which cost around $8,000. Other than that, the costs of maintaining the property were normal.
10 years later, in 2015, things were again changing.
As my grandpa always says, he “never thought they would live this long,” and money was becoming more of a concern.
Despite over 30 years of service, my grandpa’s employer-sponsored retirement account paid a measly $120 or so a month. The good news was he had also contributed to multiple IRA’s during his career. The bad news was those funds were dwindling.
Not only that, but my grandparents were now in their mid-80’s, and up-keeping the property was becoming more difficult.
Once again, it was time to downsize.
They sold the Boring house in the summer of 2015 for $400,000. This house hadn’t appreciated nearly as much thanks to the housing bubble of 2008, but owning it free and clear meant they now had around $380,000 after closing costs with which to purchase their next property.
A Smart House
Following the sale of the Boring house, my grandparents moved further out of town with the purchase of their current home, which I’ve dubbed the Smart House.
The Smart House is about as technologically advanced as they come, which is ironic being as it’s occupied by two people born almost 90 years ago.
It has central air, a vacuum system, surround sound, a sprinkler system, and all the cable wiring is in the walls. It’s completely updated inside and out, with a deck and small yard, as well as a 3-car garage.
At about 1,500 sq. ft. it’s only slightly smaller than their previous home, but the yard is a “postage stamp” and very easy to maintain.
They purchased this home for $298,000, allowing them to pocket about $80,000 and again supplement their retirement far beyond what either of them thought was possible.
Even though this home is a downsize, they both agree it’s the nicest house they’ve ever lived in in terms of updates.
August marked 3 years in the Smart House, and they’re showing no signs of slowing down. If they ever do need to move again, they know they can count on increasing equity (the Smart House is now valued around $365,000) and a fully paid off house to help them meet their needs.
So, How Did They Do It?
Through telling the story of my grandparents I’ve been able to demonstrate how one could supplement their retirement income through downsizing their home, but there are several important points I want to make clear that have enabled them to do what they did.
First, they began with much more than a starter home. The tri-level wasn’t a huge house (about 1,760 sq. ft. after adding the kitchen), but it was more than a typical starter home and sat on over 2 acres. Not only that, those 2 acres were already zoned for building multiple houses, which made them even more valuable.
In order for downsizing to work you must be able to actually downsize, either in terms of the size of the house or the size of the property.
Second, they kept the tri-level for 30 years, and made major improvements that increased the value drastically. The housing market ebbs and flows, but generally the longer you keep a property the higher it’ll go in value. Their 30-year stay (and good market timing) was what enabled them to make over $400,000 on the sale of that property.
They also made several major improvements to that house and property, a lot of which was done through their labor. Doing major renovations yourself greatly reduces the cost because you only need to pay for the supplies.
Third, they paid off their tri-level and didn’t borrow against it, meaning they’ve owned every home free and clear and were able to buy downsized homes for cash. Many people still carry a mortgage far into retirement because they keep borrowing against their house.
Owing money on the property will reduce any potential profits made from selling, which may mean you’ll need to finance some of your downsize purchase as well. At the very least, you’ll have far less money after downsizing, which cuts into your supplementary income.
Moral of the Story
The need to downsize your home in your retirement years is a common practice for many people, typically because they are no longer able to maintain it.
Nevertheless, many people don’t think about the fact that they can also supplement their retirement through downsizing their home and pocketing the difference.
However, this method for supplementing your retirement will only work if you follow the practices of my grandparents.
The initial property must be more than just a starter home for you to be able to downsize, either in terms of house size or property size. You must also own your home free and clear (or owe a very small amount) so you can purchase the new home for cash and pocket the difference.
It’s also necessary to live in each house for at least 5 years to allow the property to appreciate, and the longer the better. Keeping an eye on the real estate market will also help you know when might be a good time to sell to get the best price for your home.
Another aspect to consider is location. If you’re retired and looking to downsize, look for a location where you’ll get more bang for your buck. Remember, once you’re retired factors such as your daily commute are minimal, so you’ll have more freedom to move where it makes the most financial sense.
If you own a home, work to pay it off and make improvements and you too may be able to supplement your retirement by downsizing your home.
Talk about Money Earned and Money Saved!