For many Americans, their home ends up being one of their largest if not the largest single investment asset in their portfolio, but they neglect to incorporate it into their overall financial plan. That can be a big mistake. “People lament over selling their home; they don’t make very good decisions out of desperation or when there are high emotions involved,” says Robert Stammers, director of investor education at the CFA Institute.
Many people find they have to somehow monetize the equity in their home to live for 25 or 30 years in retirement. That’s because Social Security now replaces a smaller share of what you earned while working and 401(k) retirement plans typically provide less income than the employer pensions they replaced, and the income they provide is less secure.
Here are some talking points for homeowners who struggling with the decision to downsize to an apartment in Raleigh, NC.
When should you sell? Every asset in your portfolio should have a role—even your home. Maybe it’s your place to live until you become an empty nester, and at that point you’ll downsize and have a source of dollars for your investment portfolio. Maybe you’ll keep it until your 70s or 80s, putting off downsizing until your health demands it. Maybe you want to plan to live there and then transfer it to your heirs. Whatever your wish, talk it through with your family and your financial advisor.
Cut your real estate exposure. If half your net worth is in your home, a quarter in stocks and a quarter in bonds, you’ve got a significant exposure to the real estate market. Your home is an asset and it should be considered as part of your overall investment portfolio. If it doesn’t make sense to have that much real estate exposure, downsize, move to an apartment and reinvest it in a balanced investment portfolio.
Is downsizing cost effective? For downsizing to pay off, try a move that saves you at least 25% on your total expenses: mortgage payments and real estate taxes. Calculate all the one-time costs too: transfer taxes, real estate commissions, attorney’s fees, movers. People overestimate the value of their home if they’re selling, and they underestimate the total cost of a new home. Be sure you are considering upkeep and property taxes.
Excerpts - Forbes