Think Small and Dwell Down for Retirement

Your house is growing.

From 1978 to 2013, the average single family home grew from 1,780 to 2,660 square feet. This means more house to heat and cool, more space to clean and maintain, and more room for more stuff. And while the average house was growing, the typical family was shrinking, as the average family went from having three kids in the 1970s to two in the 2010s.

For seniors straining to pay for retirement, downsizing to a smaller home may be a solution worth exploring.

I regularly read articles and review guidance from experts on what seniors and boomers can do to solve the retirement savings predicament, and if I'm being honest, some of this guidance drives me crazy. Typically, a bunch of platitudes are recited, suggesting that seniors need to "save more" and "spend less." Sadly, this is much easier said than done. How does one "save more" as wages remain stagnant or "spend less" as costs of living continue to rise? When times are tight, as with the recent downturn, such advice is nearly impossible to follow.

One way seniors can legitimately save though is by properly downsizing. Here's how you do it:

Relocate to a smaller home in a "better" locale
Residential real estate prices in many markets have rebounded from the most recent downturn, so it may be an excellent time to downsize, cut expenses and transfer some of the value in your home to a retirement account.

By moving to a smaller home, you can decrease your tax bill and your insurance costs as well as your overall maintenance costs. With fewer square feet to heat and cool, you can save almost immediately on energy, and if you can move to an area of the country with lower property values, then you may realize significant savings while bolstering your investment portfolio. If you can move to a more urban and walkable area, then a "two-car family" may be able to lose a car and the associated payments, insurance costs and upkeep expenses. You have to be careful that you don't move to an area with higher costs, and you must factor in how much it will cost to actually move your accumulated belongings from your old to new home, but it can make a big difference.

Speaking of all that stuff, a smaller home allows for less space for your goods - which is a good thing. Fewer things automatically equates to lower costs. One no longer feels compelled to buy new furniture or a bigger television because there's no room for it. The idea is that the era of conspicuous consumption is now over. The closets get thinned out, not to be replenished with more unneeded shoes or sport coats.

Rent or buy? House or condo?
The nature of the downsizing transaction is also very important, whether to rent or buy is a critical first question. Typically, it takes at least two years to recoup closing costs when comparing buying vs. renting. So, if you are unsure of where you want to live, or if you are following your children and grandchildren and their situation might change, it is likely better to rent. In the long run, if you can purchase a smaller home, your costs will be fixed over time, and you won't have to worry about rent increases in coming years.

Choosing between a single family home and a condominium is another important decision. One must look at upkeep, insurance, maintenance and energy costs of a traditional single family home and decide if you still want to manage those costs and responsibilities. Condos are traditionally easier on the homeowner, as maintenance, some insurance and upkeep costs are covered by the entire homeowners association and can be cheaper. Note that higher-end condos bring with them higher fees.

What about going tiny?
A whole other trend is the movement toward tiny homes - those that range from 100 to 400 square feet. Picture a big treehouse or your backyard shed on steroids. The "tiny revolution" is a real thing, though it may be glamorized on reality television. Moving to a tiny house means reducing your living space to a tricked-out single room and getting rid of most of your accumulated stuff. The benefit is that overall costs are low - $35,000 buys you a top-of-the-line tiny home - and ongoing costs drop dramatically. Some people have even built these homes in their backyards so that they can live tiny while renting out their former family home for ongoing income. What you give up in space, you gain in cost savings.

As always, seniors should regularly review their assets, and look for ways to leverage them to pay for retirement costs. Art, jewelry, and other personal belongings may have grown in value, and even unneeded or unwanted life insurance can be sold for immediate cash as a life settlement.

We all deserve to have a worry free retirement, but we need to make the appropriate plan. Take a look at the options to downsize and perhaps "tiny" living may be for you.