The Surprising Costs of Downsizing Your Home

© Jamie Grill/Getty Images
© Jamie Grill/Getty Images

When I look at my retirement stash, I have to admit it’s kind of small. When I look at my house, I realize it’s kind of big. And when I consider the two together, I think that maybe I should downsize and use the equity in my house to buy a condo or add to my retirement savings and rent.

Downsizing isn’t for everyone, but it’s one of the few strategies — along with working longer, delaying Social Security or spending less later in retirement — available to near-retirees who find themselves short on retirement savings and don’t have time to catch up, says Steven Sass, of the Center for Retirement Research at Boston College. “The house is a major source of people’s savings. If you don’t want to work longer or give up eating out in retirement, downsizing should be part of the plan.” (Another way to get at home equity is to take out a reverse mortgage)

Do the math. Before you sell your house and move, add up the costs that can chip away at the amount you free up. For starters, fixing up a house to sell often means spending thousands of dollars in repairs and upgrades (new roof, anyone?). Once the house does sell, you’ll pay commissions to real estate agents on both sides of the transaction, usually to the tune of 6% of the home’s value. Packing and transporting enough furniture to outfit a two-bedroom condo will run $1,500 if you move a few miles away and $5,000 or more if you move across the country, according to the calculator at http://www.moving.com. As for the furniture you don’t keep, you could find yourself spending a few thousand dollars to ship the good stuff to your kid across country and paying a hauler to cart away the rest.

Even after the move, you won’t be home-free. Condo association fees run at least several hundred dollars a month, on top of insurance and property taxes, and if the building needs a major improvement, such as a new roof, you’ll get hit by a special assessment to help cover the cost. Renting is more predictable but leaves you vulnerable to annual rent hikes. And whether you rent or buy, you’ll surely want to buy new furnishings that fit the smaller space, says Paul Miller, a certified financial planner in Boca Raton, Fla. “You think you’re freeing up all this money by downsizing, and then you spend thousands to refurbish.”

Other expenses you might not have considered: Instead of the driveway you currently enjoy, you’ll probably have to fork over cash for a parking space. If you can’t squeeze Grandma’s armoire into the second bedroom (or bear to part with it), you’ll pay $100 a month to rent a storage unit. Because you won’t want to stash those old tax records in the second bedroom, you’ll spring for storage space in the building. Moving far away from friends and family? Factor in the expense of traveling back to the old neighborhood a few times a year. As for the next family reunion, that won’t be happening in your two-bedroom condo: Count on covering the cost of renting a beach house.

Of course, moving to a condo or apartment also allows you to cut your utility bills, eliminate yardwork and snow shoveling, and get rid of your mortgage or trade it for a smaller one — and maybe you’ll make your kids chip in for the beach house. Still, be sure to add up the pluses and minuses before you put out the For Sale sign, not after.

“There are a lot of considerations that go into the downsizing decision,” says Miller. “This may be the last move you’re going to make, so you’d better make it a good one.”

Written by Jane Bennett Clark of Kiplinger

(Source: Kiplinger)

Why Your Family Needs a Household Austerity Budget

© Thinkstock/Getty Images
© Thinkstock/Getty Images

Let’s talk about austerity. No, not the austerity proposed in Greece (although I’m probably the only one not writing about Greece). Rather, I’m talking about personal austerity. I frequently recommend that families develop an austerity budget. Let’s describe what this is and how it might help you.

In a budgeting sense, “austerity” refers to sharply curtailing spending in a time of financial crisis. Your family’s austerity budget is a plan you can put into effect in the event you lose your job or encounter some other financial hardship. Creating an austerity budget involves calculating the minimum amount of money you would need monthly or weekly to live indefinitely. I like to use this definition because it is the most practical minimum budget, as we will see in a moment. Here is what it should include:

  • Rent or mortgage
  • Basic utilities
  • Food
  • Insurance
  • Car payments
  • Debt payments (credit cards or student loans)
  • Any miscellaneous ongoing expenses that can’t be eliminated

Just as important is what it should not include:

  • Savings or investment expenses
  • Vacations or travel
  • Entertainment
  • Dining out

Since your austerity budget is meant to last indefinitely, you need to be realistic about what you will spend. For instance, it does no good to lop out all restaurant expenses if you know you won’t have the willpower to break your daily Starbucks habit. Be realistic — maybe even try living on your austerity budget for a month or two. If you find that life is unbearable without, say, your daughter’s dance lessons, then go ahead and include them in your budget. You might be able to live on a bit less than this budget for a short time, but not indefinitely.

Your austerity budget and an emergency savings account are your sword and shield against financial adversity. When crisis hits, you should know what your austerity budget is and what steps you need to take to get there quickly — such as cutting off cable TV or suspending your kids’ day care. This will maximize the amount of time you can live off your emergency savings.

For some, this might be a relatively straightforward exercise. If you’re single, you might find that your austerity budget is fairly easy to get to. Others with different obligations, such as supporting a family, may find that getting down to their austerity budget requires more action. You may also find that there are issues you should address now, so if there ever is an emergency, the people depending on you won’t be surprised by their circumstances.

I find that there is an added benefit to understanding your austerity budget. As you save and invest over your lifetime, you may find that you have socked away enough money that you could safely withdraw from your accounts an amount equal to your austerity budget. Using simple parameters like the 4% rule, you may find that you already have enough money to live a simple life indefinitely just based on your investments. Many people find peace of mind in knowing this. An austerity budget could be the true start of financial independence.

Written by NerdWallet of Money

(Source: Time)

The Exact Moment Big Cities Got Too Expensive for Millennials

Creative Commons
Provided by Creative Commons

(Bloomberg Business) — The rent has been “too damn high” in New York for so long that today’s young professionals might assume it was always that way. Yet it wasn’t until the second quarter of 2004 that the median rent exceeded 30 percent of the median household income for young workers, the threshold at which housing experts say rent is no longer affordable, according to an analysis conducted by Zillow.

Rents are stretching millennial budgets throughout the U.S. Nationally, the typical worker from 22 to 34 years old paid 30 percent of income for rent in the first quarter of 2015, up from 23 percent in 1979, when the analysis begins.  In those places, rental unaffordability is a distinct obstacle for people trying to carve out lives and careers, particularly in the nine major cities shown in the chart below, where more than half of households rent.

The median rent in Los Angeles has been out of the reach of young people since at least the Carter administration. Chicago, by contrast, was affordable for the typical young worker until 2012, the year Kanye West first appeared on Keeping Up With the Kardashians.Most millennials could responsibly budget for rent in Boston as recently as 2004, when the Red Sox broke the team’s long World Series drought. San Francisco dipped in and out of unaffordable territory for years, until—after roughly a decade of affordability—rents shot ahead of millennial incomes in 2003; they have continued to outpace salaries ever since.

A couple of forces are making major cities increasingly unaffordable for millennials at the outset of their working lives. Stagnant wages in many cities have made rental and for- sale housing harder for workers to afford.

Demand for leases has also outweighed supply in many places. In the nine cities shown on the map below, the number of renters is growing faster than the number of rental units, according to a report published in May by the Furman Center for Real Estate and Urban Policy at New York University. That trend is likely to continue if predictions for falling homeownership rates are realized.

For many cities, the affordability gap hasn’t been a growth-killer; in many, it’s a consequence of their sustained popularity. People continue to flock to San Francisco for opportunities in its technology industry, despite median rents that were unaffordable to young workers for the first time in 1982. Looming rental affordability problems in Dallas and Houston are probably the result of booming local economies that have attracted workers faster than builders can erect new housing.

Not unexpectedly, the poor have suffered most from the dearth of reasonably priced housing. In 2013, 60 percent of low- income renters were severely rent-burdened, meaning they spent more than half their income on rent, according to the Furman report. Middle-class renters are also struggling to find affordable housing: More than one-third of moderate-income renters were severely rent-burdened in Boston, Los Angeles, Miami, and New York.

The 30 percent threshold, it should be noted, is merely a proxy for affordability. Transportation costs, which are typically the second-biggest expense in most household budgets, can vary greatly for workers who take public transit and for those who carry car payments and auto insurance. That makes renting in Los Angeles look especially unappealing.

Millennials, meanwhile, can look forward to longer commutes and a harder time putting money away for a mortgage downpayment. Or move to Missouri.

Zillow compared median rents for each metropolitan area with the median income for young workers within that metro, on a quarterly basis, from 1979 through the first three months of 2015.

Written by Patrick Clark of Bloomberg

(Source: Bloomberg)