Boomers' home downsizing

It's hard enough under normal circumstances to figure out how much is needed to ensure a comfortable retirement.  But the mix of slumping housing prices, oil at around $140 a barrel and volatile financial markets makes it particularly tough today.

With energy analysts increasingly convinced that high oil prices are here to stay, and stock and bond markets expected to remain under pressure, living plans may need to be rethought.  Because of the drop in housing prices, the median household wealth of homeowners aged 45 to 54 will have fallen by 25% between 2004 and 2009, according to economist Dean Baker and research associate David Rosnick of the Center for Economic & Policy Research.  Even America's wealthiest 20% will have seen their balance sheets plunge by 27%.

The most practical approach is simply to downsize, suggests Henry K. "Bud" Hebeler, author of "Getting Started in a Financially Secure Retirement" (Wiley & Sons).  That's not a very popular chocie, however.  One reason may be that families often find that a smaller home doesn't come with a much smaller purchase price.  A two-bedroom condominium in an attractive part of a city with all the amenities typically sells for nearly the price of a comfortable four-bedroom home in a tony suburb.  "People don't save money on the purchase price by going from 2,500 square feet to 1,700 feet because they [still] want the granite countertops and the Jacuzzi tub," says Joel Larsen, a certified financial planner with Financial Strategies Group in Davis, CA.

Yet, large homes cost a lot more to maintain and are subject to higher property taxes.  The saviings from running a small home compound over time.  Plus, as we age, few of us want to perform maintenance.

Downsizing could become more common as energy costs rise and the population ages.  Hebeler advises anyone contemplating a smaller residence to act sooner rather than later.  "I believe that over the next decade, small homes are going to be relatively pricer than large ones, at least on a dollars-per-square-foot basis," he says.  Smaller homes will be in more demand, and many larger homes will be on the market.

Source: BusnessWeek, July 14, 2008