As a baby boomer with three adult children, downsizing is a topic I can relate to personally. It seems like only yesterday when we brought our first baby back to our home of a little over a year. She’s now 27. The four bedrooms and two-and-a-half baths are a bit more than the two of us need as empty nesters.
We are not ready to move out of our home, but this, along with selling other assets and downsizing in general, is a real issue for many as they approach retirement.
Selling assets can be intertwined with downsizing or it can be done for separate reasons, both business and personal. Let’s take a look at some issues to consider.
Downsizing Your Lifestyle
As you look toward retirement, ask yourself, Do I need all of that “stuff”? Whether it’s that four- or five-bedroom home, all of the stuff that’s been sitting unused in your garage or your basement, or that Suburban you bought to haul the kids around, downsizing can have a positive impact on your retirement cash flow.
Selling Your Home
If your home is too big and you are looking to downsize, selling the house and buying (or renting) something smaller can be a good financial move for retirement on several fronts:
- Any money left over after the home is sold and you are in a new residence can be put toward your retirement savings.
- Lower or no mortgage payments. This will of course depend upon how much your current home is worth compared to the home you would buy or rent.
- Lower maintenance and utility costs, including lower costs to heat and cool your new home.
- Lower property taxes, but this will depend upon several factors including where you move.
- Lower transportation costs. If you move from a more remote suburban area to an urban area with public transportation, you may not need those two cars or even one. This is a bit of a trend for some retirees who live near large urban areas like Chicago.
- Lower costs for health care and long-term care if your downsizing includes a move to an area of the country where these costs are lower.
- Lower state income and sales taxes. Again, this will depend upon relocating to an area of the country where these costs are lower than your current location.
As with any financial transaction, look at the entire picture before going this route.
Selling or Donating Unused Household Items
Over the years it is normal to accumulate a lot of “stuff” you just don’t use anymore. This might include tools, furniture, electronics, clothing and other items. This could also include items of value like old jewelry or art and collectibles that have lost their appeal to you. Depending upon the nature and value of the items, you might consider donating them to a qualified charitable organization and taking a tax deduction. You will need to assign a value to these items, and you would be wise to become familiar with the IRS rules in this area.
Another route to go is a garage sale or eBay, depending again on the type of item or its value. For higher-end items there might be a dealer who buys and sells items of this type. Even with a lot of seemingly small, insignificant items, you might be surprised at how much they bring in. Also, you are rid of the clutter they have been causing.
As you head into retirement, downsizing and selling off assets can go hand in hand. This can be a way to raise some cash, get tax deductions from donations to charity and reduce your expenses in retirement.
Selling a Business or Related Assets
Another type of asset sale that might occur at retirement is the sale of a business or an interest in a business.
Ideally you would have a succession plan in place prior to retirement. Perhaps this includes an arrangement where family members who are already involved in the business will buy you out over time.
Or you might sell to a manager or other employee who is able to arrange the means to buy the business.
If you have business partners or are in a professional partnership, hopefully there is a mechanism in place to sell your interest to your partners. In the event your partners are all around your age, this might not work. In a larger organization such as a law firm, doctor’s practice or other good-sized professional practice, this is pretty common.
For those without a succession arrangement, you will need to try to sell your business to a willing and interested buyer. Financial advisors are an example. Many are in their 50s and 60s and are solo practitioners. There are several firms that do nothing but try to help these advisors sell their practices. Unlike a business that manufactures or distributes a product, a professional services firm like this has only its client list as an asset. There are few, if any, physical assets or inventory to sell.
It is important to save for retirement along the way. It is equally important to have a plan in place to realize value from your business pursuits, as this can provide a substantial financial cushion for your retirement.
Planning for retirement is about more than just building a nest egg by saving in your 401(k), which is critically important. What will your lifestyle look like? This goes hand in hand with potentially downsizing your personal assets as you move into retirement, which might entail moving to a smaller residence, selling or donating your “stuff” or downsizing your vehicle either in size or the number you own. And if you own a business, you should be making plans to monetize the value of your life’s work as an asset for retirement as well.