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Home Downsizing Has Become More Difficult, But It Still Pays

Richard Satran

A growing number of baby boomers who say they want to find smaller homes to save money are putting it off. Financial planners say it has become more difficult to downsize in recent years, but it can still be a smart decision that people should consider if they want to save money.

"Rightsizing the home is still one of the significant ways that people can stabilize their finances in retirement," says financial planner Jeffrey Christakos of Westfield Wealth Management. "Reducing maintenance costs [and] freeing up of capital are very effective tools."

[See: 6 Tips for Boomers Leaving Big Homes Behind.]

However, many who want to trade down find reasons to put it off. Coldwell Banker Real Estate reported in a 2011 survey of 1,300 real estate agents and brokers that 87 percent had clients looking to downsize. Despite the large number of people who have shopped for smaller homes, the numbers don't show a big uptick in homeowners who follow through with the move.

"The rate of people trading down hasn't changed a whole lot," says Walter Molony, economic issues media specialist for the National Association of Realtors. About one in four people selling a house now buy a less expensive one, although the data hasn't reflected the massive bulge of baby boomers reaching retirement age.

What's keeping empty nesters from taking flight? For one, the empty nest is not necessarily staying empty due to young people returning home in record numbers because of a weak, low-employment economy. People nearing retirement are also discouraged by recent economic setbacks, according to real estate experts and financial planners. The stock market crash, real estate bust and job losses have taken a toll. Even though mortgage rates are low, banks have tightened requirements. The bridge loans to finance a new home while selling an old one are particularly difficult to obtain. And mortgage approvals are based more on job outlooks than they were in the past, adding a hurdle for an older worker or retiree.

Still there is still plenty of opportunity to save money by downsizing. It may not come as the big profit windfall boomers were expecting when home prices were soaring a half-decade ago. But four of five Americans ages 55 to 64 own their homes, and as longtime homeowners, they have a disproportionate share of home equity - the AARP Public Policy Institute reported in 2010 they held $100,000 on average, and home prices have risen since that estimate.

Not everyone has gained in the uneven housing recovery, but that's not entirely bad for downsizers. With the flexibility they gain in retirement, they can target lower-priced regions. That means avoiding places where relatively strong job markets have boosted home prices, including cities such as San Francisco, New York City and Washington, D.C. "Boomers downsizing now are more likely to move to smaller, more affordable cities, not the largest ones," says Brendon DeSimone, a real estate agent and blogger for Zillow. "They want to be connected, and they like the things urban living offers. And they are finding that in smaller cities."

Finding affordable housing does not necessarily mean traveling great distances and leaving family and friends far away. Even overheated housing markets are ringed by pockets where home prices are more affordable, DeSimone says. But more people are finding it less challenging to travel further - even outside the country - in search of affordable housing in retirement.

[Read: 3 Keys to Mastering New Home Loan Hurdles.]

"The Internet has made life a whole lot easier for expats in remote places: no more waiting for letters, checks and newspapers to arrive on the mail boat," says Graham Colville, a retired editor who moved to Cyprus and uses the Internet to pay his taxes online. While he thought Cyprus would be a pleasant place to downsize with a lower cost of living, he still needs to travel frequently. He made seven trips back to the U.S. for family-related issues he needed to attend to in a single year. "You really need a contingency fund for those kinds of things," he says.

Finding a lower-priced home is not the only way to save money in a downsizing. It's about reducing overall costs and changing to a more suitable lifestyle. In fact, the average downsizer moves into a home worth just $27,000 less than the one he or she sold, Molony says.

Cutting back on mortgage payments is also critical for downsizers. "They are trading down and using equity usually to pay cash for this property," Molony says. "They want a smaller property and lower maintenance costs." Being near services and shopping is also a big goal and a way to cut transportation costs.

No one would argue that today's retirees can match the same level of financial security that defined benefit pensions provided. But with careful planning and budgeting, it can be done.

[Read: Your Home, The Big Tax Shelter Many Financial Planners Overlook.]

"People always say that when they retire and sell their homes they are not going to spend as much. But in that first couple of years after they move to a smaller home people often have more free money, and they end up spending more on eating out and travel," says Bill Allen, vice president of Schwab Private Client Investment Advisory. "It's only later they realize they are spending down too much of what they have."

People tend to plan "based on the best-case scenario," Allen says. "But you really need to be objective and stick to a financial plan and stay inside a budget to make your retirement sustainable." Some people avoid it entirely until they are forced to make a move by job loss or illness.

"When you downsize it tells the world you are getting older, and it becomes an emotional decision. Some people are not quite ready to make that change," DeSimone says. "People try to time the housing market, waiting for the perfect moment, but you can't sell a home overnight. You really have to start the process well in advance."

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