The Up & Downs to Downsizing in Retirement

A woman getting ready to move to a new house after downsizing in retirement.

If you’re a homeowner looking ahead to retirement, you’re probably hearing a lot about downsizing these days. And depending on your local real estate market, the decision may even feel more urgent.

But is downsizing the best option for you?

Some people heading into their golden years opt to stay in their current home. After all, it’s familiar, chances are they raised children there, and many Americans have paid their mortgage off by the time they reached their 60s, or are close to doing so.

In fact, a recent survey indicates that 52 percent of baby boomers “expect they will never move from their current home.”

But if you consider that over 40 percent of U.S. adults are expected to run out of cash after they retire, staying in your current home and “aging in place” could also be a risk.

Uncle Sam is aware of the scope of the problem, too. January 2020 saw the start of the SECURE Act, the most sweeping legislation addressing retirement in 13 years.

With uncertainties over the U.S. retirement landscape and the lure of enjoying a home with less maintenance, it’s no wonder why the prospect of downsizing into a smaller home is becoming a viable option. Especially if you can net a good amount of cash after exiting your full-time career.

It’s not only for financial reasons that retirees downsize, however. Some choose to do so for lifestyle or health reasons.

Whatever reasons motivate you to downsize, keep in mind that “downsizing” itself has many interpretations. You’ll want to define whether you’re considering downsizing in terms of price, square footage, overall upkeep and maintenance, or all of the above.

Because not all “downsizers” are what real estate agents call “move down buyers.” Yes, downsizing typically brings to mind selling a larger home and opting for a smaller home, perhaps with one-level living. But some retirees downsize their single-family house in the suburbs and opt for ditching their mortgage payment in favor of renting a condo in the city, which may even be the same price or greater for a smaller footprint, but provides all the amenities they want. Others choose to “rightsize” or even “upsize” to match the lifestyle they want in retirement.

So before you put your current home up for sale, here are some factors to consider.

The Pros of Downsizing in Retirement

You can usually knock off your mortgage.

Data from the Federal Reserve notes that 35% of U.S. retirees (up to the age of 74) still hold a mortgage in retirement. Even 23% of U.S. retirees are still paying down their home mortgage.

When you sell your larger property, chances are good that you can use the proceeds to pay down your mortgage, which not only removes the debt once and for all, it gives you more money to enjoy in retirement.

Your household bills are often lower.

In a smaller space—whether it’s a single-family, townhouse, or condo, your household bills (think utilities, property taxes, homeowner’s insurance, landscaping and maintenance, and general upkeep) will generally be lower

That translates into less stress and more cash in your pocket by moving from a larger home to a smaller home.

You could possibly reduce your cost of living geography-wise.

In general, it costs less to live in states (especially those with no state income taxes) with a lower cost of living.

For starters, you get more house for your money, as real estate prices are lower, without sacrificing a quality standard of living. In many instances, you’ll even better it, as you have the extra money to travel, attend the theater, hit a ball game, or take local classes at nearby educational institutions.

The Downsides of Downsizing

The real estate market may work against you.

There’s no guarantee you’ll save significant money by downsizing to a new home, especially if the real estate market you’re focusing on doesn’t cooperate.

Like any dynamic financial marketplace, the real estate sector in your select area could be saddled with a tight housing inventory, which drives up the price of homes, big and small. Or, you may not get your asking price for your current home, meaning you’ll save less by moving to a smaller property.

According to the National Association of Realtors, homeowners of retirement age who downsize their home sell their current property for an average of $270,000 and buy a new one for $250,000. 2

That begs the question—is saving $20,000 a good deal in that scenario?

It costs money to sell a home.

Yes, there should be a big payday when your home is sold, but get ready to open your checkbook to sell your current home.

First, you’ll need to take care of any lingering problems in the home, like walls that need painting, upgrading a kitchen, and roof repair – all are common expenses when selling a home.

Then there’s the time and energy needed for decluttering and arranging to donate big items, such as old furniture you don’t want to take with you.

Lastly, there are commission fees and closing costs you can expect to pay or professional help in selling the property. Moving expenses can also add up, with a price tag of $5,000+ not uncommon.

A good budgeting plan early on can mitigate some of these costs, but you’ll need to be prepared to spend some money to sell your home properly.

Family concerns.

Ask most retirees who downsize to a new home several thousand miles away from family and friends, and they’ll tell you missing loved ones so far away can be a real challenge.

Not every downsizing move has to take you away from your family, but many do. While you can’t put a price on family, expect to pay extra on travel costs to see your adult children and grandkids – or have them fly to see you.

Tips for downsizing your home in retirement

If you decide to downsize your home in retirement, have a good plan in place that includes these action steps:

Get an appraisal on your current home.

You can’t put your current home on the market without knowing what it’s worth. You can have a professional home appraiser come to your home, check out the property and the neighborhood, and give you a good idea of what your home is worth before you decide to put it on the market. A good real estate professional can help give you a ballpark figure, as well.

Get a good handle on your retirement income.

You shouldn’t make any decision about downsizing without figuring out your retirement income. Meet with an advisor who can go over your 401(k), IRA and other investment accounts and give you a solid picture of your financial future. Also, check your potential Social Security income at the agency’s “Retirement Estimator” website.

If you want to learn how you can potentially increase your retirement income, see our video class, How to Retire with Confidence. You’ll learn strategies to help you increase the money you get to keep after you retire.

Estimate your mortgage “sweet spot” on your new downsized home. Once you know what your home is worth and what you can count on, income-wise, in retirement, you can start looking for a new house, one that fits your lifestyle and goals.

Then figure out your optimal mortgage on a new home using online mortgage affordability calculators.

A candid discussion with a local real estate agent and your financial advisor can also give the financial blueprint you need to downsize and buy a smaller home.

The takeaway on downsizing in retirement

Downsizing into a smaller home—or right-sizing into the home for your next season—can be a tough decision.

After all, leaving your current home with so many warm memories isn’t easy for some homeowners, but the money you can potentially save in doing so can cushion your retirement income and give you a more financially comfortable retirement experience.

That’s why it’s so important to plan ahead, talk to your family and your financial advisor, and make the retirement downsizing decision that meets your unique needs and desires. They can help you sort through the complex details to make the best decision for your situation.

Have questions about your situation? You can talk with one of our advisors for a complimentary, no-obligation call.

Sources:

1

2