I recently helped a friend downsize to a smaller home for her retirement. While it worked out for her, I realized that it would actually cost me more money to downsize than it would to simply convert my current home into a retirement home. A recent article by CNBC explored the downsizing debate. More than 40 percent of baby boomers ages 50 to 64 said they planned to move within the next 5 years, according to a recent Demand Institute survey. While researching different places for my friend to live in retirement, I discovered several downsizing financial traps that I helped her avoid.
Paying CDD fees
Many of the subdivisions in Florida charge a "community development district" or CDD fee. Some Realtors include the CDD fee under the "taxes" section of the home listing because it's included in the real estate property tax bill. I helped my friend buy a short sale home in a subdivision that did not include CDD fees. The CDD fees pay for the infrastructure of roads, utilities and amenities of the community, but is often paid off in communities that are 30 years or older. If I downsized to a neighboring CDD community, I'd pay an extra $2,500 a year.
Researching property taxes
My friend was shocked to find her property taxes went up when she moved from a small town in North Carolina to Florida. However, part of the problem was that she didn't apply for a "homestead exemption" that provides an additional property tax exemption for people who live in Florida most of the year. One of our relatives pays four times as much in property taxes even though she has a smaller home. Downsizing to a smaller home in the wrong state could be a financial nightmare. Although our property taxes may go up by the time we retire, we are only paying about $1,500 a year due to the housing downturn. If we moved to Connecticut to live near my father-in-law in retirement, we would pay an extra $3,000 a year in property taxes.
Saving money on transportation
Although my friend is still able to drive a car, she will eventually need to give up her vehicle. One of the advantages of living in our Florida community is that there are wide paved paths and bicycle lanes. Some young people in my subdivision drive golf carts to the grocery store or to visit friends in nearby subdivisions connected by the paved trails. Even though we don't live in a city, we live within walking distance to all the amenities we would desire in retirement. If we didn't live in a pedestrian-friendly suburban community, I estimate we would spend $4,000 a year in vehicle and insurance costs in retirement.
When my children graduate from college, we will become empty-nesters in our 40s. Our plan is to start making renovations and redecorating with our eventual retirement in mind. Since we own a one-story home, we don't need to install an elevator. By the time we retire, we will have our home paid off. We will have paid for all of our home improvements and renovations as well. I'm not planning to pay for closing and moving costs in the name of "downsizing," because sometimes maintaining more home is a way to save more money.
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More from this contributor:
- Retirement Benefits
- Investing Education
- property tax