Trading Down No Longer Safe Retirement Strategy

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Once upon a time a majority of people followed this seemingly fiscally sound path: Buy a home, spend your working years paying it off, and then sell it so you can trade down once the kids left. Magically, all that built-up equity could fund your retirement.

What a fairy tale!

Today the baby boomers are discovering that selling their home isn't the golden ticket it once was, reports the Wall Street Journal. The Journal references a Harvard study that indicates that "mobility rates among seniors have posted the sharpest drop." When the costs of moving and selling a home at a loss are evaluated, it makes financial sense for some seniors to stay put. Others find themselves underwater due to the housing market collapse or natural disaster.

What happens to the retirement wishes of all those folks who anticipated heavy paydays with the sale of their home? And what can younger generations learn from this?
Seniors may still benefit from selling their home at a reduced price. First, from the liquidity of cash from the sale. The cash might allow them to postpone withdrawing money from an IRA or other nestegg. It may also allow delaying Social Security payments. If the new, smaller space is selected carefully they may also see the anticipated reduction in cost-of-living expenses. But not always, if the new place has high condo fees or other expenses.

Seniors also might benefit from renting, following a not-as-big-as-anticipated home sale. Renting allows the luxury of trying out a few locations before making a decision on a new purchase (if at all). It doesn't come with the tax writeoff of homeownership, but you can move in a pinch.

Boomers unwilling to sell at a loss could lead to an oversupply of larger homes, thus bringing prices down even further.

Boomers who want to "trade down" for a smaller place also have the disadvantage of fewer potential buyers in the market for their present homes. Gen X is suffering from wage stagnation and most Gen Y adults don't anticipate owning a home until their 30s.

Younger generations can learn from this market reality by realizing that, for a variety of factors, homeownership may not be the "everything investment" it seemed to earlier generations. Younger people should keep in mind what makes a "great location" and consider owning a smaller home than their parents, if at all.

At the very least, the current housing market is a good reminder that living simply and within your means, while paying down debt, will be to your advantage later.
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