Should You Downsize for Retirement?

For many individuals, the family home is both a significant asset and a major expense item.  But it may also provide an emotional connection to important interpersonal relationships.  And lastly, where we live in our older years has a practical side based upon our physical limitations and preferences.  How do you go about making the decision to downsize?  Here are some of the factors to consider.

Lower housing expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan?  What percentage of your gross income are you devoting to your mortgage payments today? Even if your home loan is 15 or 20 years old, you still may be devoting a significant part of your gross income to it. When you move to a smaller home, your mortgage expenses may decrease (or disappear) and your cash flow may greatly increase.

You might consider buying a smaller home with cash (if finances permit). Perhaps that smaller home could be in a state or region with lower income taxes and a lower cost of living.

You could capitalize on  home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some unforeseen factor like a corporate downsizing, you might have a sudden and pressing need for retirement capital, another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows.

On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the family and friends close by).

Sometimes retirees underestimate the cost of downsizing. Even the logistics can be expensive. Just packing up and moving a two-bedroom condominium’s worth of furniture will cost about $1,500 if you are resettling locally. If you are sending it across the country, the journey could cost $5,000 or more. If you can’t sell or move everything, the excess may go into storage, and the price tag on that may be well over $100 a month. In selling your home, you will probably pay commissions to both your agent and the buyer’s agent that add up to 6% of the sale price.

Run all the numbers and get a second opinion if necessary. Downsizing always seems to have a hidden cost or two, but for many retirees, it can open a door to long-term savings. Other seniors may find it cheaper to age in place.  It may be a good time to analyze your budget.

In addition, the sale of real estate also may involve some tax and estate implications; the potential loss of itemized deductions, the question of the gain in the property and the option to transfer the property to heirs.  Each scenario is different and it may be wise to consult with professional advisers to be sure your decision doesn’t create any harmful unforeseen consequences.

Winfred Jacob, CFP®

Winfred Jacob
Winfred Jacob