Ep #160 - The Hidden Challenges of Downsizing the Family Home in Retirement

[00:00:00] Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now. 

[00:00:27] Ben Haas: Hey, Adam. Discussion today, you and I had a little talk not too long ago, just how much retirement planning we do that just sits with this baseline assumption that somebody's gonna age in place. We'll ask the question, you know, when it comes to the house and where you're gonna be and what you're gonna do, we just make that assumption. 

And I think the reality is in planning is that most people don't just decide to downsize someday because they woke up and were excited to leave the family home. It's quite the opposite. Maybe somebody passes away, the maintenance becomes too much, things just get difficult. So this is a huge asset in somebody's life. 

We as planners, I don't know where this conversation's gonna go today on feeling like concrete advice, but we ought to bring awareness to this is eventually gonna be a discussion. And I think the sooner we can talk about it, 'cause we'll get into some of the financials, the better off somebody's gonna be. 

So let's just see where the conversation takes us today on this, the house and downsizing and the role it plays in retirement in the later stages of life 

[00:01:29] Adam Werner: Yeah. And it's the reality of this just being one of the financial assets that somebody accumulates over a lifetime, potentially, that has the emotional component to it, right? I can't recall a conversation that we sat down with a, you know, a client saying, "I don't know what I'm gonna do with my 401k as I'm getting older, and like I feel the emotional attachment to my, you know, my workplace retirement plan." 

That's probably not going to be the case. But you're right, there is the-- it for many people, it is many years of accumulation of things, of memories, of gatherings, and you just-- you name it. People have a much different attachment to what could be for many people, a very large portion, you know, of their net worth, right? 

Of their financial life. And we don't-- we certainly don't wanna minimize that. But I think anecdotally, we've kind of seen this with different clients. That idea of downsizing doesn't always work out financially that it is, you know, the windfall that maybe it, it once was. And I don't know if that's just dynamics of the world that we live in right now, the economy that we're in, just the way the housing market has moved over the last decades. 

I think that initial idea of, "I'm gonna have the family home, I'm going to retire. I don't need the big property, all of the upkeep that goes along with it. I'm gonna sell it, and I'm gonna buy something much cheaper that's more suited to me." And what we've been seeing is sometimes it doesn't necessarily turn into that much cheaper subsequent purchase. 

Sometimes it's a lateral move, but what you're trading monetarily is for some of that peace of mind. It's less maintenance, it's less upkeep. It's hopefully less surprises that come with maybe owning a bigger property or a larger house, and you're trading that for some more certainty. 

But it's not always the slam dunk obvious decision. 

[00:03:22] Ben Haas: Well, and doesn't-- Oh, man. Doesn't that just make it all the harder to kinda come to some conclusion if it's not just, "Hey, this is a good financial thing for me because it'll be a little bit of a windfall. We can move into something that might, you know, be more independent living." And for that, I'm giving up this place where there are all these milestones, holidays, was where we raised our kids, you know, maybe the house has been in the family forever. 

Doesn't it make it so much harder when you're actually maybe feeling forced to make this decision, right? If you can't live independently, if it's become too much, maybe it's after the first spouse passes away. And then put on top of that, by the way, this isn't gonna be a windfall for you, it's gonna cost you more money to move to some other place where now, you know, maybe there is the good of getting some assistance or maybe not having to upkeep a property. 

But by the way, we didn't really build it into your plan that it's gonna cost you extra money after you sell your home. I mean, that's a tough spot. 

[00:04:17] Adam Werner: Yeah. Well, and, and yeah, I guess a great point there just being so much better to be-- if you're potentially facing this decision, so much better for that to be on your own timeline where you can control a lot of the factors, right? And maybe it is just that, it's just the timing aspect of it. 

But yes, we've certainly seen this too, where, what's the saying? Failing to plan is planning to fail or whatever the fun terminology is. But we've seen that, right, where you get to a certain point and yes, either health declines or somebody passes away and it forces the sale of a property, and at that point, options are removed and may not always have worked out in the ideal situation if it would've been a more conscious decision upfront. 

[00:05:04] Ben Haas: Yeah, and what makes this conversation hard to have too is all family dynamics are different, again on what that house means and to how many different people it means something to. But I think that's why, I mean, we just had a conversation, geez, two hours ago, where there seems to be some really proactive planning where there are those discussions, you know, where this house has been in the family for more than one generation, currently lived in by, you know, somebody in that family, but now things are gonna have to change, and at least they're doing, I would say, the good work of going, "Okay, here's what this means to the estate. Here's what this means to this blended family. Here's what this may mean to you financially." Because more often than not, I think we, we are often in the situation where we hear what the parents think, but we don't really know what the kids think. And what we often see when we're brought into that equation is, yeah kids appreciate the memories, but nobody's gonna live in that house, and now it's gotta be liquidated anyway, and now maybe there would've been a better way to go about it 

[00:06:01] Adam Werner: Yeah. And that's, that's one of those things that I don't know. Is that a generational thing? Because I agree, and we've seen it, right? Where it is we see the parents in this situation making that decision to say, "No, I'm gonna, I'm gonna, I'm gonna stay. I'm gonna age in place because I want this house to go to my kids," but have never had the conversation with their kids to know do they want this house. 

Because that would be, in my mind, that would be the worst case scenario is that now somebody's going to make decisions that aren't necessarily in their best interest in order to preserve something for the next generation, and the next generation when they inherit it go, "Well, I don't want this," so it's gonna get sold and now we're where we could've been and maybe in a much different spot, you know, 10, 15 years earlier. 

That's my fear. 

[00:06:47] Ben Haas: Yeah, and I'm gonna, I'm gonna take this to a different spot, Adam. But just had a conversation last night with one of our clients, you know, socially, but we had conversations with her a little while ago that, okay, now mom can't age in place. This client had this second property that she was looking to age in place in, but now is thinking, "I'm gonna have my mom come there." 

But there's this whole greater plan of, well, how do we pay for this? There's another sibling, but she owns the property, meaning our client and she has to do all these renovations, right? So, so now there's a heck of a lot of projection here going into, well, if you're gonna make all these renovations to get this property to where somebody very senior can live, that does change the marketability later in life for that home, right? 

Because that may not be now suited for a more traditional family. So there's just lots and lots of conversations, and this conversation can go any number of directions when we just think about the role of that home, a property, and the value of that, and what it's gonna mean to somebody's individual plan and the next generation. 

Sorry, just made me think of that story. 

[00:07:51] Adam Werner: No, it's-- that's-- it's the perf- it's the perfect example where it can get very muddy very quickly. And even maybe you touched on it a little bit there, just something as simple as what are the tax implications of downsizing? We know for most people, at least in, in our area here, you know, a married couple can exempt up to five hundred thousand dollars of capital gains on their primary property. That's not out of the realm of, of-- again, in this area, maybe that plays a role if the house has just grown in value over a very long period of time. But there is also the other side of if you don't downsize and you decide to age in place, there is the benefit that if it is inherited, there is that step up in cost basis. 

So in theory, that is a better tax situation than your heirs, you know, inheriting in early or having to pay taxes or yourself maybe having to pay taxes. So there, there are some dynamics there too, but I wouldn't want that to be the driving force in, in this decision, right? We're approaching this from the standpoint of, yes, it is a financial decision, but it's-- for us, it's not so much about the dollars and cents. 

It's what makes sense for this person's plan. And by plan, I mean, what would they want to see happen? In an ideal world, what would-- If they could ma- wave the magic wand, what would they want that to look like? And then let's figure out the financial path that we need to take to get there, rather than let's just focus on the tax side of things and let the tax tail kind of wag everything else. 

[00:09:26] Ben Haas: Yeah, and I can almost hear you saying this in a different conversation, but it's that whole you have to take care of yourself first, right? If the plane is going down, put your life vest on before you're going and helping anybody else. And maybe that's, you know, some of the focus here. 

If we're speaking directly to our clients here, not the next generation, part of this has to be what is going to serve you best, recognizing that you may have thoughts for that next generation, and yes, let's talk about capital gains. Let's talk about what happens if this house now gets split in three ways if you do noth- nothing different. 

But I think it is, you know, we want to have this conversation with our clients earlier so that they can think about what is going to serve them best and make that the focus. Because all too often, you know, and it's a wonderful thing, but all too often we do hear, "Well, you know, what i- what is this gonna mean for the kids, and how do I make sure that this is efficient for them?" 

That's great, but not unless we're taking care of you first, and again, we gave some couple examples here where downsizing in space is not often downsi- downsizing in financials. 

[00:10:24] Adam Werner: Yeah. Yes. Well, and even not to drag this on further, but even in a recent scenario that we've seen somebody downsizing, right? Selling the property to go into an in-independent living situation, sometimes it's just the logistics, right? If somebody doesn't have the lump sum of available cash outside of, you know, the equity in their home, or if a lot of that wealth is tied up in a retirement account, in an IRA or a 401k, that can create some other subsequent planning concerns just to come up with the cash that may be needed to purchase that next property. 

And maybe this is more of a problem when it is going into either assisted living or independent living, where there is that much, much bigger lump sum needed upfront, maybe even before you would sell your property 

[00:11:11] Ben Haas: Yeah. Thank you for going there. Here I am, like sticking on all the emotional things, and you're bringing some financial wisdom to all this. Because that is becoming far more popular, right? It is, you know, that baby boomer generation, these senior living com- communities that intend to have people live independently for a while we know a lot of people that are drawn to that. 

Not only because there is a degree of socialization, especially as maybe kids and grandkids are spread out all over the place in the world. You know, now there is a community where they can be active, where meals are there, there's entertainment, there's, you know, good socialization. But it also provides them with some sort of backstop that if I do start to need some assistance, you know, I'm still within that community, but maybe I'm shifting around. 

But to your good point, that usually takes some resources on the front end. 

[00:11:57] Adam Werner: Not only just some resources on the front end, but it's also, I guess the name of the theme I'm trying to get across here is just to be proactive, right? To be able to have the conversation. We're hoping that people will start to think about this if they maybe-- if they haven't already. 

They don't need to decide today, right? The-- I'll say the retirees that we are mainly talking about or that we work with in that, you know, 55 to 70 range maybe aren't quite there at the downsizing phase yet. But I think the thoughts are probably starting there with conversations we are having. So again, you don't have to have your final decision made, but start to explore what's possible or maybe what you would want to see happen at some point in the future so that if some changes are needed now with some runway, great. 

Let's be proactive and make those adjustments when you do have the time. Again, maybe going back to earlier part of the conversation, that's usually one of those worst case scenarios where if you don't have an idea of what you'd like, and then you're trying to make that decision when it's too late, when you're kind of forced into that situation, then we just know a lot of those options kind of vanish. 

[00:13:05] Ben Haas: Well, and I don't want to compound the conversation here, but for those people that listen to every podcast, we just spoke very recently on the complexities of life and this feeling that, you know, we've got-- we've accumulated so many different things in so many different places. 

I'm just imagining and following what you just said. You know, now someone's maybe forced to make a decision that they haven't thought through. I'm gonna stick to just after the first person passes away, and it's-- now it's an even a m-more emotional time to have to unwind a lot of things and make these big decisions. 

So while it is a little bit uncomfortable to kind of be somewhat proactive with that, I think it's not only for that emotional component that I'm mentioning, but tying back to something else you said. Okay, if maybe we're gonna need a down payment for something different in a couple years, and all my assets are tied up in the value of my home and IRAs, gosh, we gotta go to that IRA and pull out a huge lump sum. 

That's gonna hurt from a tax perspective, where we maybe could have been drawing out sooner or coming up with a different withdrawal plan. So I just think having the conversations allows us as planners, too, to think for you proactively on, well, here's how we can adjust some of these variables to try to give you better options with wherever that takes you later in life. 

[00:14:14] Adam Werner: Yes. That's it. That's... I could not say that better myself. That's exactly the name of the game. 

[00:14:21] Ben Haas: So give up while we're ahead. Thank you for bringing some financial wisdom to this. I know we came into this saying, you know, this is not concrete, here's, you know, if A then B financial planning. But gosh start to have the conversation. That has to be the takeaway. And if that's gonna include other people, the next generation, I know talking with, you know, finances with fam- family is not always the easiest thing, but gosh, it's just, it's good to know what people need or are thinking or wanting so that if that's an important input to you that you share that with us, your planners. 

[00:14:53] Adam Werner: Yeah, absolutely. 

[00:14:56] Ben Haas: Thank you for your 

[00:14:56] Adam Werner: All right. See you next time. 

[00:14:59] Ben Haas: You got it 

[00:15:00] Adam Werner: Bye 

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.  

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