Time flies, doesn’t it? It seems like only yesterday you were bringing home your first-born and contemplating an enlarged lifestyle: more living space, a family car, another mouth to feed, and so on. Then, poof! A few fast years later, the kids are grown. They’ve got grown-up kids of their own. Next thing you know, you’re knocking about an oversized house, tired of dusting all those knickknacks.
I run across this scenario a lot. Couples reach their 70s or 80s, decide to sell their primary residence, downsize to a townhouse or condo, and invest some of the tax-free proceeds in an open account earmarked for ongoing retirement income and capital. The rest of it funds more immediate purchases.
But how much is “some”? How do you assess how much cash to stash and how much to spend upfront?
We used to estimate about 30% of the sale of a principal residence would end up in a nonregistered (taxable) investment account. That figure would typically provide income in the range of 4–5% of the capital for 20–30 years.
That was then. As I continue my reflections on my 25 years as a financial professional, I thought it would be useful to tell you what I see really happening these days when people decide to downsize their homes.
Over the years, I’ve determined that 15% is a more realistic percentage to plan for instead of the traditional 30% of the proceeds. Immediate spending is often more than you might think, due to at least five common, but often underestimated “bites” that get removed from the proceeds of the sale:
- Moving costs, real estate commissions and legal fees. Figure in the range of $10,000 to move, and 5% for commissions, and $5,000 in legal fees (such as to update your estate plans).
- Your next residence. The recent run-up in Toronto and Vancouver housing prices has led to an increase in home sales, which may or may not impact how much you get out of your house and how much you’ll pay for your next move. Figure, for example, you may sell your larger home for $1.5 million and downsize to a $1 million condo.
- Incidentals. Moving always seems to generate extra, unanticipated costs like new furniture, renovations, remodeling and repairs. These expenses can easily run up to $50,000 without breaking a sweat. I’ve seen them go as high as $250,000.
- A new car. For some reason, I see many couples decide the extra liquidity warrants a new car to go with their new lifestyle. Figure another $40,000–$50,000.
- Your children. It’s amazing how often I see this happen. Just as you’re looking to sell your home, your children come to you, asking for help funding a down-payment on their home, or a business venture, or a wedding … or a divorce. Cha-ching. There goes another $50,000 or more.
So what’s left to invest? Not as much as you planned for! Here’s an entirely realistic scenario:
| Sale of your home Real estate commission Moving costs Legal fees New condo Renovations New car Helping the kids Remaining balance | $1,500,000 $75,000 $10,000 $5,000 $1,000,000 $45,000 $40,000 $100,000 $225,000 |  |
If you do the math, that leaves closer to 15% of the proceeds of the sale for investing. If we had been using our older, 30% rule of thumb, the remaining balance would need to approach $450,000. But after 25 years, I’ve learned that 15% is a better rule of thumb when planning to downsize your home and thinking through how much is likely to end up as investable assets. Experience is hard to beat.
