Downsizing in retirement

Planning where you will live in your later years

People often talk about eventually downsizing their home when they get to retirement. Practically, it doesn’t make sense to clean and maintain unused space once the kids have flown the coop.

Financially, this may be intended as a way to release tied-up capital to help supplement retirement income, but just how much becomes available – if any – depends on where and what kind of destination you have in mind.

Whether you are driven by the finances, or just see it as a byproduct of a lifestyle choice, you need to carefully think through and plan how to proceed. A misstep could be costly in either respect, so here are some things to mull over.

Are you assuming downsizing will be a financial windfall?

All else being equal, it costs less to maintain a smaller property. But between here and there is the matter of moving. Maybe you’re leaving a house in the big city for a humbler abode further away. However, if you’re moving within the same geographic market, the financial effect may be neutral at best, despite reducing the physical footprint.

Between the real estate commission on selling the old place and the land transfer tax on buying the new one, you’re likely well past 5% of your sale price before you even hire the movers.

Add to that some updated appliances, new/smaller furniture, window coverings and other settling-in costs, and your physical downsize could be more of a lateral move financially. That’s not necessarily a bad thing, but thinking through the finer details can give you a clearer view of the full picture.

How will the new digs fit your relationships and lifestyle?

Having reviewed your finances, you may consider looking beyond the local area or at a different kind of housing.

How far are you going?

A more distant move could affect the frequency and amount of time you are able to spend with family and friends. Maybe you’re moving closer, but if not then you could face challenges logistically, emotionally and financially. Consider too the impact on church/community connections, and professional/personal relationships like your doctor, dentist, hairdresser/barber, and massage therapist.

Cozying up to neighbours, or too close for comfort?

If you are moving to a different kind of accommodation, say from a detached home to a townhouse or condo, have you thought about how that will feel? Some people are comforted being in closer proximity to others, whereas some may feel crowded. Elevators and underground parking are great conveniences, but to some they are a personal security concern. Being in the city with a balcony view can be invigorating or intimidating.

Decisions on a lifetime of stuff?

In terms of your physical surroundings, how much do you want to hold onto and how much do you want to leave behind? It’s safer and less physically demanding not having to navigate stairs and maintain an outdoor space. But what if gardening is your thing? And with less space to maintain, you also have less room to host holiday family gatherings, or even just have the grandkids for a sleepover. What matters to you?

How about taking a test-run?

If things don’t work out with the new place then you may want or need to move again. Clearly that can be disruptive and inconvenient, and if you become a serial mover then financial strain could mount.

One way to test it out, whether before or after you sell, is to use a service like airbnb to live for a couple of weeks or a month (or a year, like a friend I know) in a place near and similar to what you’re considering. Discuss it with your real estate professional and your financial advisor to make sure you have the right information about both the market and yourself before making a more permanent commitment.

To sleep, to wake, to make better financial decisions

Here’s one of those Running Thoughts … Despite (because of?) the pandemic, I’ve been making a point to get out for a run whenever the weather even closely accommodates, and otherwise I’ve been keeping up with my indoor workouts. Either way, the earphones are in, so I’m getting in more audiobooks and podcasts.

I just got through a rather lengthy book this afternoon, Why we sleep from Matthew Walker. This link takes you to Walker’s author page, where you’ll find a link over to Amazon if you want to buy the book – OR, you can do as I did, and borrow it from your local library. In my case, I listened to it on cloudLibrary.

While I didn’t think I was all alone in having occasional sleep challenges, Walker provides an eye-opening view (sorry … typed that before I realized how cheesy, but I’m leaving it) of just how prevalent and problematic sleep challenges can be. He reinforces over and over how drowsiness is worse than drunk driving (in terms of its statistical frequency, not morally speaking).

My own sleep challenges

As a young(er) adult, like many I thought I was almost immune to sleep problems. Once our babies were on the bottle, I was the primary night-feeding designate, as I could be done and back to sleep almost immediately, often 2 or 3 times on a given night. My belief was bolstered (to my detriment) by the ease with which I could rise early for flights, adapt to time zone changes and hotel beds, and fall asleep right after coming back in the door. (Hmm, those regular absences might also explain why I was on tap for baby bottles when I was home.)

Things changed in recent years, with changing job responsibilities, changing jobs altogether, and just changes in me due to age (this last one not boding well, given that I’m not yet at the age when this is more commonly a concern).

Thoughts on sleep and personal finance?

Your ability to focus is significantly impaired if you are not getting 7-9 hours of sleep consistently. Despite the bravado claims of people who burn the candle at both ends, they are paying for that now, and will pay for it in future in terms of weakened health, frayed relationships and reduced life expectancy.

The simplest application of this material is that one should be careful to be well-rested before making any significant financial decision.

And as financial decisions go, a house purchase is the biggest for most of us. If you have been going through bidding wars, you can literally be losing sleep for weeks on end. Walker’s research shows that your cognitive ability declines in a measurable way when this happens. With the very personal nature of a home purchase, there’s a danger that your emotional drive could overtake your logical side. With so much on the line, it’s important to stay alert so you can keep those two influences in balance.

Walker explains how you can’t catch up on lost sleep one night by simply adding the same amount the next. He emphasizes that it doesn’t fit the analogy of accumulating credits that you cash in later.

Looking now at real credit and debt management, that’s the classic situation where people may lose sleep. Your ability to appreciate, analyze and manage your debt will be compromised if you can’t bring your best brain to bear. Staying awake at night (possibly intentionally) could take you down a spiral that causes large and long-term harm. That’s not to suggest that it will automatically be easy with a good night’s sleep, but if you are able to get that sleep then you give yourself much more of a fighting chance.

Walker’s recommendations for good sleep health

Walker has 12 recommendations, and I’m noting here the key points that stood out for me. You can check out the book yourself for the full list:

Have a regular sleep time. This is #1 for a reason! In fact it’s even more important to have an alarm that tells you when to go to sleep than one that tells you when to get up.
Go to bed only when you’re sleepy, and avoid sleeping on the couch
Avoid daytime napping if you’re having trouble sleeping at night. And if you are a napper, don’t do it after 3pm.
Again if you’re having problems, don’t lie in bed more than 20 minutes dwelling on getting to sleep. Get up and do something relaxing until the urge to sleep returns.
Remove anxiety producing worries by learning to decelerate before going to bed.
Understand how the chemical attributes of nicotine, caffeine and alcohol affect sleep, and how they affect your own sleep.

And one last thing … exercise can contribute to greater sleep consistency. Be sure though to finish 2-3 hours before bedtime so that your body is sufficiently cooled down.

A loan for home improvements

Payback points to ponder

Much as we enjoy our homes, it seems we’re bombarded with suggestions on how to change it all up. Whether it’s magazine glossies, home reno TV shows or seemingly endless social media posts, it’s hard not to cave-in to the allure of making things bigger, more comfy, trendier, or just plain different.

It can be especially tempting if you have a home equity line of credit (HELOC) available to fund those dreams. Freed from annoying financial constraints, you can focus on making the vision in your mind today your lifestyle tomorrow.

But be careful, as there’s another tomorrow after that, meaning that eventually you have to pay up. It’s not inevitably bad, but let’s take a closer financial view.

The emotional benefit laid bare: Lifestyle lift

Before descending into the finances, let’s accept that by building the equity in your home, you have put yourself in the position to make these changes. After years living and reflecting on your space, you know what best suits you, and what will suit you even better in future. With the benefit of some unbiased professional advice on the options you’re considering, you’re ready to make it happen.

Have a building budget and a construction timeline

Whether you are doing the work yourself or engaging a contractor, make sure you have a budget and a timeline. With a contractor, well … have a contract. Clearly outline the repercussions if the terms are not met, and think practically about if and how you will enforce them (or why bother?). An unbudgeted project runs the risk of ballooning up to whatever is available, so do your homework ahead of time.

The purpose of borrowing money determines the tax treatment

When you paid down your home mortgage, neither the interest nor the principal repayment was tax-deductible. In the case of a HELOC, if the advanced funds are used for an income earning purpose, the interest can be deductible. In this case where you are using that cash to pay for personal living expenses, the interest is once again not deductible. Repayment of the HELOC principal isn’t deductible at all.

Financial planning and repayment timeline for your HELOC

Interest may be historically low, but a HELOC is usually a floating rate debt, meaning the rate will rise if and when interest rates rise generally. As both interest and principal are non-deductible for personal purposes, you will have to earn money, pay income tax on it, then make your payments. Laying emotions aside, the best first step to a home improvement is to know how much you can afford out of your weekly paycheque to pay off any loan. That gives you the cap on your budget, and the practical project limits.

Living versus investing

A common comment you will hear, perhaps out of your own lips, is that home improvement is an investment. While it is true that some renovations may add to property value, unless you are about to sell, it’s mainly a lifestyle decision. Be ready to literally live with and within the project you undertake, so you can enjoy the results for years to come, and put the costs behind you sooner still.