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Four Tips for Investors Who Downsize

YahooNews

You turn 65, leave the job, sign up for Medicare and then sell the old homestead to buy a cheaper home, pocketing ems of thousands in cash, maybe hundreds of thousands.

Downsizing may make sense on paper, permitting you to pocket equity for living expenses, but it’s kind of like a dog pursuing a car: What does he do when he catches it? Should you throw the money into the stock market? Buy an annuity? Put it in the bank for safekeeping?

“If you can get past the emotional attachment of your home, downsizing is a good thing to do,” says Mark Painter, founder of EverGuide Financial Group in Berkeley Heights, Fresh Jersey. “Most of the time, the children have began their own families, and the need for a large home is no longer there.”

Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin, says he is downsizing himself and urges others to be clear about their objective.

“We just don’t need as much space being empty nesters,” he says. “Plus, I don’t want to cut the grass, mow the lawn or trim the shrubs. I want the freedom to travel more, just get up and go!”

Experts say people considering this kind of budge should keep some things in mind:

Don’t loser yourself. Many homeowners find they don’t pocket all that much in a downsizing after all. Even if the fresh home is smaller, many people don’t want to downgrade their lifestyle, so they opt for a smaller place that’s lighter to maintain and live in but not necessarily cheaper.

“We’d like a one-level townhome,” Anderson says. “The challenge in our market near Minneapolis: Homes in the design and square footage we seek are around $350,000 to $500,000. I’m presently attempting to sell my home for around $439,000. This is ordinary math. There isn’t much left to pocket, if anything at all.”

Painter notes that, “The money received from the downsizing in many cases was not part of the financial plan. Part of this money should be used for instant enjoyment such as a long-awaited tour. The rest of the money should be invested to help meet your retirement goals.”

Look at all-in costs. While the fresh home might, in fact, be $100,000 cheaper than the old one, don’t leave behind moving costs and the real estate agent’s commission from unloading the old place. And be sure to assess utilities costs, property and income taxes, and sales tax you will save or encounter in the fresh state or city. Then there are lifestyle costs, like flights to see family and friends, meals out and entertainment. Will the budget indeed be smaller in the fresh home?

Often, it is the savings in ongoing costs like maintenance and taxes that make downsizing appealing, says Adam Grossman, founder of Mayport Wealth Management in the Boston area.

“Downsizing can often cut your monthly expenses very substantially,” he says. “You’ll have a lower tax bill, lower utility expenses and generally lower maintenance expenses. This includes lawn care, snow removal, gutter cleaning — the list goes on.”

But many downsizers end up spending as much as they did previously, or even more, says Sandra McPeak, managing director for investments at Wells Fargo Advisors in Rolling Hills Estates, California.

“Clients are most inclined to spend at least the same amount in retirement as they spent while working because they consider this to be their baseline spending, which may or may not be a sustainable spending rate,” she says.

McPeak says she tells clients to assess a diversity of downsizing options in different communities before determining what to do.

“I suggest that they think about not only the costs, but also the amount of maintenance, amenities and location,” she says. “Also consider what their life will be like in the future and how that will influence how they want to live. For example, will a single-level home be more (suitable) to their physical abilities in the future?”

Think long term. A 60-something sitting on a fresh pile of cash may have to make it last thirty years or more. Inflation will take a toll, even at today’s low levels, and could kick up during those decades. At the same time, a retiree needs to play it a bit safer than a junior investor, minimizing the need to take large sums from investments during a market downturn.

Before determining what type of investments to choose, the downsizer should determine whether the aim is to preserve the proceeds from the home sale, to grow the principal or to invest for a stable income, Painter says.

Cash, while safe in a bank, will lose purchasing power over time. In fact, many target-date mutual funds designed to last through retirement keep as much as fifty percent of the portfolio in stocks, even for investors in their 70s, in hopes of keeping ahead of inflation.

Corporate bonds, real estate investment trusts or preferred stocks will suggest higher yields than bank savings, but, while not as risky as stocks, can lose value as market conditions switch.

Grossman says many downsizers can simply parcel out the proceeds among investments they already have.

“The asset allocation decision for home sale proceeds should be no different from one’s overall asset allocation choices,” he says. “In other words, the fresh money should be folded into the overall financial picture.”

He notes, however, that the ideal asset allocation might switch if the nest egg is substantially larger with the downsizing funds.

Look at alternatives. One is to buy an annuity, an insurance product that pays monthly income. Instant annuities begin paying right away and proceed for life. Deferred annuities make the policyholder wait a number of years but can pay much more, also for life.

Another alternative is to stay where you are and plan to take out a switch roles mortgage someday, to tap equity in the old home without having to sell. You’ll make no payments, but interest charges will be added to principal and paid off when the home is sold, whether before your death or after. By law, the lender cannot force a sale or require the borrower to repay more than the home fetches in a sale.

Jeff Brown spent almost forty years as a newspaper reporter, columnist and editor, including twenty years writing about investing, individual finance, the economy and financial markets. He spent twenty years at The Philadelphia Inquirer and has been freelancing since 2007.

Four Tips for Investors Who Downsize

YahooNews

You turn 65, leave the job, sign up for Medicare and then sell the old homestead to buy a cheaper home, pocketing ems of thousands in cash, maybe hundreds of thousands.

Downsizing may make sense on paper, permitting you to pocket equity for living expenses, but it’s kind of like a dog pursuing a car: What does he do when he catches it? Should you throw the money into the stock market? Buy an annuity? Put it in the bank for safekeeping?

“If you can get past the emotional attachment of your home, downsizing is a good thing to do,” says Mark Painter, founder of EverGuide Financial Group in Berkeley Heights, Fresh Jersey. “Most of the time, the children have commenced their own families, and the need for a large home is no longer there.”

Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin, says he is downsizing himself and urges others to be clear about their aim.

“We just don’t need as much space being empty nesters,” he says. “Plus, I don’t want to cut the grass, mow the lawn or trim the shrubs. I want the freedom to travel more, just get up and go!”

Experts say people considering this kind of stir should keep some things in mind:

Don’t idiot yourself. Many homeowners find they don’t pocket all that much in a downsizing after all. Even if the fresh home is smaller, many people don’t want to downgrade their lifestyle, so they opt for a smaller place that’s lighter to maintain and live in but not necessarily cheaper.

“We’d like a one-level townhome,” Anderson says. “The challenge in our market near Minneapolis: Homes in the design and square footage we seek are around $350,000 to $500,000. I’m presently attempting to sell my home for around $439,000. This is elementary math. There isn’t much left to pocket, if anything at all.”

Painter notes that, “The money received from the downsizing in many cases was not part of the financial plan. Part of this money should be used for instant enjoyment such as a long-awaited tour. The rest of the money should be invested to help meet your retirement goals.”

Look at all-in costs. While the fresh home might, in fact, be $100,000 cheaper than the old one, don’t leave behind moving costs and the real estate agent’s commission from unloading the old place. And be sure to assess utilities costs, property and income taxes, and sales tax you will save or encounter in the fresh state or city. Then there are lifestyle costs, like flights to see family and friends, meals out and entertainment. Will the budget truly be smaller in the fresh home?

Often, it is the savings in ongoing costs like maintenance and taxes that make downsizing appealing, says Adam Grossman, founder of Mayport Wealth Management in the Boston area.

“Downsizing can often cut your monthly expenses very substantially,” he says. “You’ll have a lower tax bill, lower utility expenses and generally lower maintenance expenses. This includes lawn care, snow removal, gutter cleaning — the list goes on.”

But many downsizers end up spending as much as they did previously, or even more, says Sandra McPeak, managing director for investments at Wells Fargo Advisors in Rolling Hills Estates, California.

“Clients are most inclined to spend at least the same amount in retirement as they spent while working because they consider this to be their baseline spending, which may or may not be a sustainable spending rate,” she says.

McPeak says she tells clients to assess a multiplicity of downsizing options in different communities before determining what to do.

“I suggest that they think about not only the costs, but also the amount of maintenance, amenities and location,” she says. “Also consider what their life will be like in the future and how that will influence how they want to live. For example, will a single-level home be more (suitable) to their physical abilities in the future?”

Think long term. A 60-something sitting on a fresh pile of cash may have to make it last thirty years or more. Inflation will take a toll, even at today’s low levels, and could kick up during those decades. At the same time, a retiree needs to play it a bit safer than a junior investor, minimizing the need to take large sums from investments during a market downturn.

Before determining what type of investments to choose, the downsizer should determine whether the purpose is to preserve the proceeds from the home sale, to grow the principal or to invest for a stable income, Painter says.

Cash, while safe in a bank, will lose purchasing power over time. In fact, many target-date mutual funds designed to last through retirement keep as much as fifty percent of the portfolio in stocks, even for investors in their 70s, in hopes of keeping ahead of inflation.

Corporate bonds, real estate investment trusts or preferred stocks will suggest higher yields than bank savings, but, while not as risky as stocks, can lose value as market conditions switch.

Grossman says many downsizers can simply parcel out the proceeds among investments they already have.

“The asset allocation decision for home sale proceeds should be no different from one’s overall asset allocation choices,” he says. “In other words, the fresh money should be folded into the overall financial picture.”

He notes, however, that the ideal asset allocation might switch if the nest egg is substantially larger with the downsizing funds.

Look at alternatives. One is to buy an annuity, an insurance product that pays monthly income. Instant annuities commence paying right away and proceed for life. Deferred annuities make the policyholder wait a number of years but can pay much more, also for life.

Another alternative is to stay where you are and plan to take out a switch roles mortgage someday, to tap equity in the old home without having to sell. You’ll make no payments, but interest charges will be added to principal and paid off when the home is sold, whether before your death or after. By law, the lender cannot force a sale or require the borrower to repay more than the home fetches in a sale.

Jeff Brown spent almost forty years as a newspaper reporter, columnist and editor, including twenty years writing about investing, individual finance, the economy and financial markets. He spent twenty years at The Philadelphia Inquirer and has been freelancing since 2007.

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