"Downsizing" is a familiar word to Americans approaching retirement. For most, it refers to cutting back on spending and selling, gifting or donating unneeded possessions, as well as the possibility of moving to smaller, more affordable quarters.
If only resetting your life for retirement was that simple.
In reality, it means a thorough inspection of money issues and lifestyle expectations that truly determine whether you're really ready to make the transition. If you've diligently saved and planned for retirement, most experts say you should do this "final approach" three to five years before your planned retirement date. If your retirement finances aren't as stable, it's smarter to start transition behavior as early as possible while time is on your side.
If you feel underprepared, you're not alone. The Demand Institute, a nonprofit think tank founded by business research giants Nielsen and The Conference Board, reported last October that if the 2008 crash and its after effects on employment, investments and housing prices had not happened, the typical Boomer household would have a net worth roughly 2.5 times what it is today.
That is all the more reason for many Americans to review and possibly "reset" their retirement clocks. Here are some suggestions to help you figure out where you are on the pre-retirement spectrum and some changes you might consider:
Get a retirement checkup. Seek a financial advisor and tax advisor to evaluate your current retirement assets and determine the savings, spending, investment and tax strategies to help you set -- or reset -- a reasonable retirement savings goal and date.
Evaluate low-cost cities that make sense for you. Great retirement destinations offer more than great weather, inexpensive housing and an affordable tax environment. Consider both financial and lifestyle-related factors including family proximity, a lower cost of living, entertainment, education or health facilities. Where should you start? You've probably seen popular lists of retirement communities in leading magazines, and they supply good food for thought. National agencies like the Council for Community and Economic Research produce an annual cost of living index for over 300 U.S. urban areas. It's also a good idea to consult family and friends for on-the-ground anecdotal advice that can be confirmed through research.
Get realistic property valuations. Even in a rising economy and recovering housing market, many homeowners need a reality check about real estate prices. The same likely goes for other valuables like antiques, jewelry and art.
- The market price you're likely to get for your home, less any remaining mortgage debt, real estate agent fees or necessary presale fix-up costs on your current property. You should have early conversations with real estate agents to get an idea of how marketable your property actually is and whether renovation or repair might fetch a higher price.
- The affordability of property in the location(s) you're considering and whether you're planning to buy or rent.
- Your creditworthiness if you're going to have to take out a mortgage on your new property.
- Potential cost-of-living as well as state and property tax savings you'll hopefully achieve at the new location.
- Moving costs to the location(s) you're considering. Get bids early to get a sense of what it would take to move your current furniture and possessions (this will inspire some downsizing on its own) and consider moving at less-busy, optimal weather times of the year for best pricing (early fall, late spring) if you have that flexibility.
Talk about taxes. If you make a huge profit on your home, you may owe taxes on the sale. Current IRS rules allow most couples to exclude up to $500,000 in home sale gains from their taxable income and singles to exclude up to $250,000. Check with your tax advisor and consult IRS Publication 523, "Selling Your Home."
- The average real estate broker's fee of 5 percent. Related closing costs on a sale add a percentage point or more.
- Fix-up costs of 1 percent to improve the looks or mechanics of the home for sale.
- Moving costs of at least 2 percent.
- Fix-up and furnishing costs of roughly 2 percent for your new address.
- Rule No. 2: Some experts believe that if the new address doesn't help you cut your major post-move living expenses (mortgage, rent, city, state and property taxes, food, transportation) by at least 25 percent, stay put and find other options to raise cash until the numbers make more sense.
Decide whether you'll work or play post-retirement. Will you look for an encore career once you retire? Will you start a business? Will you be able to simply relax and live off your retirement income? These are the essential savings, spending and lifestyle questions to consider as you reset your retirement. Get answers as soon as you can.
Bottom line: Setting a "final approach" to retirement means taking stock of financial assets, lifestyle goals and adjusting your money behavior as soon as possible to assure a soft landing.
Jason Alderman directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney