AssetBuilder Registered Investment AdvisorDownsizing may be the best retirement decision millions of boomers can make. It’s relatively easy to do. And, as you’ll soon see, the lifetime benefits can be enormous.

But first, meet John and Jane Bighouse. They’re about to downsize. He’s 64. She’s 62. He earns $100,000 a year as a project manager, and Jane hopes to make $30,000 this year as a Realtor. They live well and, like many couples, finally got to buy their dream house ten years ago.

That’s when the last tuition bill was paid, the kids were off the payroll, and the dog died. John and Jane regularly joke about how weird it is that they now live in a 3,000-square-foot house, but they raised two kids in a 2,000-square-foot house. Their decision isn’t unique. A legion of advertisers sees empty nesters as the mother lode of discretionary income for travel, upscale products, home improvements, second homes, boats, and expensive cars.

So when the Bighouses had an opportunity to save big time, they opted instead for a larger house and a designer kitchen with granite countertops. It seemed like a good idea at the time.

Now they have a problem.

John is pretty sure his job will disappear next year. Showing cautious couples dozens of houses to make a sale is starting to wear Jane down. Both are thinking 2009 may be the year to retire, ready or not.

Not.

John has $200,000 in his company 401(k) plan. They’ve also got $10,000 in their checking account and $100,000 of mutual funds in taxable accounts. Most of their net worth is tied up in their home, now worth $800,000. That’s double the $400,000 purchase price ten years ago and only $250,000 remains on their 6 percent mortgage, with a monthly payment of $1,800. No one would consider them poor, but they are heading for a major drop in their standard of living.

Using ESPlanner software, the lifetime security planning software that I’ve mentioned in many earlier columns, John learns that their total income in 2009 will be $39,000. While it will rise to a maximum of $56,000 (in constant dollars) in a few years, that’s a gigantic drop from the $130,000 they’ll earn this year.

More than half of that $39,000 of income will come from his Social Security benefits of $21,565. Jane will start collecting benefits of $10,590 on his work record, but not until 2011 when she is 65. Assuming a 7.5 percent return on their investments and a 4 percent inflation rate, ESPlanner finds they can sustain a real, inflation-adjusted consumption of $18,536 a year for as long as they live as a couple. Jane will have the same equivalent amount in the years she is likely to be a widow.

This $18,536 a year is what they will have left to spend on themselves after they have paid their income taxes, housing expenses and Medicare premiums.

John thinks it will be difficult to get along on $18,536 a year. So does Jane.

Then Jane has a flash of insight. “John, if we raised two kids in 2,000 square feet, maybe we can retire in less than 3,000 square feet.”

“Are you suggesting we give up his and hers closets?”

“Yes. If we eliminated all the clothes we never wear, we’d only need about half a closet.”

“Do you have any particular size house in mind?” John asked.

"I’m thinking condo or townhouse. I’m thinking two bedrooms, two and a half baths, and about 1,200 square feet, 1,500 tops. That’s the space we can live in. We don’t need to keep the Perpetual Kid bedrooms. And if we lived in a smaller place I could, finally, get out of cooking Thanksgiving dinner.”

“How much do you think that might cost?”

“Let’s try $250,000.”

When they enter those changes into the program, they get a very pleasant surprise. The combination of selling to buy a smaller house, not having a mortgage, and increasing the taxable investment portfolio more than doubles their lifetime consumption. Instead of having to live on $18,536 a year, they’ll have $40,027 to spend on things beyond taxes, shelter and Medicare.

There are other decisions they can make, such as his delaying taking Social Security benefits, but few will increase their effective standard of living as much as downsizing. Other couples who are house rich and investment poor may have more, or less, dramatic results, but few would suffer from downsizing.

On the web:

Happy Downsizers, tell your story here

Consumption Smoothing Columns

My new book “Spend ‘til The End” (which has more on downsizing)

“Spend ‘til the End” on Amazon for $17.16

ESPlanner website