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.