The kids are off to college, your parents are still living independently, and there you are with your significant other, roaming around a big, empty house wondering why, and it hits you: “Let’s downsize!” Financially, it makes perfect sense. You’re paying for a lot of house you’re not using. You’ve got a big yard to maintain and a lot of stuff that you haven’t used in years. If you’ve owned the house for a while, you probably have some equity that could be used to supplement retirement, pay off some debt, or take a nice, long vacation. Sounds too good to pass up; so, you take the plunge and spend the next several weeks, or months if you’re a pack rat, cleaning out the house. It’s never as easy as expected. You have to make some hard decisions on what to keep, what to donate, what has value and can be sold, and finally, what to put into the dumpster.
At last, you see light at the end of the tunnel, and the house goes on the market, sells and you move into your smaller, more practical home. Though it was a lot of work, the results are worth it, your expenses are reduced, and you have more time to enjoy the empty nest. If you’re like most baby boomers, you’ve at least given downsizing some thought, or you know someone who has actually done it. Speaking from personal experience, the payoff from all the hard work is definitely worth it – a simpler, less cluttered life with more free time and some extra cash. One of the most important parts of the process for us was finding out what really mattered to us – what really had value. We spent most of our adult lives accumulating stuff, and some of it seemed so valuable when we first bought it. But over time, we realized we could easily do without it.
I also learned a very important lesson that I can use to help my clients, most of whom come from that baby boomer generation. They’re carrying around all the financial stuff they’ve accumulated as they’ve changed jobs, changed advisors, or invested in the next hot strategy, and for many, a “financial downsizing” is just what they need.
For example, many of my clients have multiple 401ks and IRAs, all managed differently to reflect their situations at the times of purchase. Just like a couch, you can probably get by fine with just one. Having multiple retirement accounts can be costly, and I’ll bet many of them hold similar investments, or worse, hold investments that you just don’t need or want anymore! Combining these accounts can reduce costs, improve efficiency, and allow you to organize your retirement assets to reflect your current goals and risk tolerance. While you’re digging through the boxes of old financial statements, be sure to look at your life insurance policies, annuity statements, and any legal documents. You may find that the life insurance policy you bought 20+ years ago has enough cash value accumulated to allow you to stop making payments, or maybe you can simply cash out if you don’t need the coverage any longer. The annuity you bought long ago may be outdated and not meeting your needs anymore. If you bought it more than 10 years ago, it probably doesn’t have an income or long-term care rider. If it’s past the surrender period, you can replace it with one that provides more benefits, and you’ll most likely get a bonus for doing so. Maybe you have a variable annuity that hasn’t performed that well and has high fees, or you just want to take the money out of the market to protect the gains you’ve made. Another area where positive changes can be made concerns wills and trusts that haven’t been updated recently. Take a look at these documents to see if they still accomplish the goals you intended for them when they were drafted. If not, get rid of them or have them revised to reflect your current needs.
Finally, be sure to review the beneficiaries on all your documents and investment accounts to make sure the money will go where you want it to after you’re gone. A lot can change over one’s lifetime; births, deaths and divorce can wreak havoc on a well-crafted estate plan if not taken into consideration. So, as we come to the close of another summer, maybe it’s time to downsize your “financial house.” Don’t just put all of your financial stuff in a box and bring it with you. Take a good, hard look at what you own, all your investments, and insurance. Decide what to keep, what to sell, and what to send to the dumpster. I’m confident you’ll end up with a financial house that is less cluttered, more efficient, and a lot easier to care for.
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