The high cost of housing and other living expenses is prompting many individuals to consider downsizing. However, advisors recommend gradually reining in your spending habits over time rather than rushing a major lifestyle or budget change.
Marci Bair, president and founder of Bair Financial Planning, said that downsizing looks different for each person and their financial plans.
In her experience, some clients are empty nesters who want a “smaller footprint so they don’t have as much overhead financially or property upkeep. Or frankly, they don’t want the kids boomeranging back.”
A Pew Research Center study early this year found that 57% of young adults (aged 18 to 24) still live in their parents’ homes, up from 53% of young adults in 1993. The survey also found that less than half of young adults (45%) were “completely financially independent” from their parents.
Another way to downsize might entail looking at different cities, instead of just smaller homes or apartments.
“Sometimes it’s just a lateral move as far as housing, but the city or state is less expensive,” Bair said.
Impact on Early Retirement
“We also think of downsizing with respect to early retirement and the pros and cons of that. If they downsize, could they retire earlier? And what would that look like? The pros could be that you’re young, maybe healthier and you could travel more. Maybe you focus more on your health and wellness … your hobbies or your passions,” she explained.
“You also have this big gap where you’re likely paying more for health insurance, until you’re 65 and able to get Medicare,” Bair said of various factors that might prompt someone to downsize.
If retiring early, “you’re also tapping into your retirement accounts sooner and for a longer period of time. The majority of your portfolio growing is from that compounding interest. But also, you’re trying to stretch that income for even longer. If you’re retiring at 55, that’s around 30 years [to stretch that income],” she added.
Expenses to Target Beyond Downsizing
Jen Dawson, owner and managing director of Hemington Wealth Management, noted that housing costs are often the first expense that individuals target — but not the only one.
“Housing is one of the biggest expenses. In general, housing may be around 30% of your income. …The big three with spending are housing, food, and transportation,” she said.
As the cost of housing continues to skyrocket, even the 30% rule of thumb (to cap your rent at 30% of your gross income) appears to clash with a growing number of renters’ realities.
In fact, more than half of U.S. renters exceed that 30% target, according to a January report by Harvard University’s Joint Center For Housing Studies.
“Though rent growth has recently slowed substantially, the extended period of rising rents during the pandemic propelled cost burdens to new heights,” the report said.
“At last measure in 2022, a record-high 22.4 million renter households spent more than 30 percent of their income on rent and utilities. This is an increase of 2 million households over three years and entirely offsets the modest improvements in cost-burden rates recorded between 2014 and 2019. Among cost-burdened households, 12.1 million had housing costs that consumed more than half of their income, an all-time high for severe burdens,” the report said.
Dawson said that, overall, discussions around downsizing are “hard conversations, because you’re changing your lifestyle.”
“You need to be really clear on the 'why,' especially if you’re forced to do it now, because you don’t have the income,” she added.
Dawson recommends that individuals prepare to downsize by closely tracking their spending without judgment: “Give yourself data.”
Do a Test Run
Dawson often advises younger clients who aren't near their retirement years to discuss their financial goals with an advisor, trusted friend, or family member every six months to try to stay on track.
“Figure out one to three things you can do better. Don’t try to change everything in your life at once,” she said. “It could be that you determine, I need to save more to my 401(k). That could be part of a downsizing plan … a focus on saving more for [your] future. Maybe that means spending less on food, or maybe [you] don’t need the fancy car,” she said.
“Have a six-month strategy of figuring out what you want and getting into the nitty-gritty of what that means from day to day,” Dawson added.
Those who have the smoothest transitions are those who steadily alter their spending, she noted. “I think the most satisfied people are the ones who have been planning [to downsize] for years rather than months, or were forced into it. It’s part of a long-term plan or arch. It’s not making decisions in an emergency.”
Bair similarly recommends that clients do a test run, so to speak, of their lifestyle on a smaller budget.
“Try it for six months in a row, or eight months in a row, to see if you can actually do it. Then you can really see if you do need to save more,” she noted.
Bair's found that it’s not until clients start living several months under a new spending plan that they begin to accept that supposed “one-time expenses,” like needing new tires or buying a new refrigerator, will continue to crop up.
“You’re going to still need a buffer,” she said.
Rising Costs
While inflation has eased since post-pandemic highs, the prices of many goods, including groceries, remain high for consumers, according to an August Bloomberg report.
As such, Bair said she has spoken with more people who are inquiring about downsizing.
“It’s a combination of day-to-day costs going up, but also property values being high,” she explained, noting that many people may be interested in selling a home and downsizing to something smaller.
“Depending on a client’s age, renting may be more advantageous. If they’re older and are only going to be living there for about 10 years, it may make more sense to rent. Based on their age and life expectancy, that might make more sense instead of putting all of those assets from the sale of the house into another house,” Bair said.
Renting could also allow a trial run for those who want to relocate for a lower cost of living, she added.
A recent survey by USA Today Homefront found that around a third (34%) of Americans who moved in the past year named affordable housing as a factor driving their decision. Meanwhile, 27% of respondents said they moved to an area with a lower cost of living. The survey polled 2,184 Americans in July who had moved within the past 12 months.
“Sometimes people are wanting to move to another state or new country,” Bair said. “In that case, we almost always recommend that someone rent. Because they may get there [and change their mind]. You might still want to stay in that state, but in a different part or city.”
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