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Downsizing for Retirement: Is it right for you?

Retiring comes with a lot of big decisions, from lifestyle to income to taxes and everything in between. One decision topic that comes up time and time again is downsizing and what living arrangement makes the most sense for retirement. 

There’s a lot of personal factors that go into this decision, but I wanted to briefly touch on the basics to help shed some light on a common question. 

Let’s take a deeper dive into downsizing for retirement:

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

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? When you took out your mortgage, your lender likely wanted your monthly payment to amount to no more than 28% of your total gross income, or no more than 36% of your total monthly debt repayments. Those are pretty standard metrics in the mortgage industry.1 

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 lessen (or disappear) and your cash flow may greatly increase. 

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could be in a state or region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some 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.    

If you’re thinking of making this change or need help navigating your own personal situation, please be sure to contact our office before making any changes. We can help you look at all angles of your circumstances and create a strategy that’s aligned with your financial goals.

The lifestyle reasons to downsize (or not).

Maybe your home is too much to keep up, you don’t want to climb stairs anymore, or 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 friends close by).  

Related: How to Mentally Prepare for Retirement

Sometimes retirees underestimate the cost of downsizing.

Even the logistics can be expensive. Just packing up and moving a two-to-three-bedroom home will cost about $1,250 if you are resettling locally. If you are sending it long distance, you can expect the journey to cost around $5,000, if not more. If you can’t sell or move everything, the excess may go into storage, and the price tag on that may be around $90 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.2,3,4

Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire if the real estate market slows. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars over time. 

Related: The Impact of Rising Rates

Downsizing for Retirement: The Next Steps

Run the numbers as accurately as you think you can before you make a move. Downsizing always seems to have a hidden cost or two, but for many retirees, it can open a door to long-term savings. Others may find it cheaper to age in place.

Have you been weighing the options of this topic lately? If you feel you need to prepare more for the future or reexamine your existing retirement strategy, I’d love to set up some time to chat. 

We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.

Citations.

1 – nerdwallet.com/blog/mortgages/two-ways-to-determine-how-much-house-you-can-afford/ [4/26/22]

2 – investopedia.com/articles/personal-finance/061914/downsides-downsizing-retirement.asp [9/16/21]

3 – moving.com/movers/moving-cost-calculator.asp [4/27/22]

4 – gobankingrates.com/saving-money/home/why-still-wasting-money-storage-units/ [8/31/21]