When Should Retirees Downsize Their Homes?

Should you downsize your home when you retire? The answer depends on your individual circumstances. Factors to consider include your goals (such as travel), the related costs, and health issues. Weighing all the factors will help you decide if downsizing is the best decision. 

Key Takeaways

• Downsizing to a smaller home after retirement can have its advantages, such as addressing mobility issues—where smaller and fewer steps are better—and allowing you to travel. 
• Before selling, consider the cost of moving and the potential loss of friend and family relationships.  
• Instead of selling your home, you could try renting it out or renting out a portion of it. 

Factors Influencing the Downsizing Decision

Maybe you’re at the point where there’s no longer a need to pay the expenses that come with a large home. Maybe you’re living on less income than you used to, so making your money last is a serious concern. However, letting go of a family home is not an easy decision.

“Downsizing is both a financial as well as an emotional decision,” says Allan Katz, CFP, ChFC, CLU, president of Comprehensive Wealth Management Group in Staten Island, New York. “It often becomes a necessity, because retirement income may not sustain the expenses. It would also make sense if it means downsizing expenses, which can now be used for other things, like family vacations, taking care of grandchildren, etc.”

Selling the home could be the perfect way to cut costs, but that is not always the case.

Costs of Selling

Selling your home comes with some significant expenses. You may have to update your home to get the best price, and you could lose up to around 6% in realtor commissions. If you make enough money in the sale, capital gains taxes could take a big bite out of your earnings.

The Costs of Moving

You also have to purchase or rent somewhere new to live. If your new place is much smaller, you might need less or smaller furniture. There are also all the costs that come with moving: closing costs, movers, and other incidentals you may not anticipate.

Intangibles

Moving to a sunny climate may seem attractive, but it might mean having to leave lifelong friends, family, community, and doctors with whom you have built relationships over time. 

“Relationships are important, and they aren’t as easy to develop as we’d like to assume. Because of that fact, don’t treat this issue too lightly. You may not make new friendships in your new home as easily as you did in your old one … given that you are now in a different stage of life,” says Bruce Wing, ChFC, CLU, RHU, REBC, managing partner of Strategic Wealth, LLC in Alpharetta, Georgia.

When it comes to selling a family home, partly due to emotional attachment, many people think their house is worth more than it actually is. Before committing to the idea of selling, get a realistic view of the likely selling price with a few real estate agents, and consider having the house appraised.

The decision to sell requires totaling all of the costs associated with moving to see if it makes sense.

“Drafting a comparison of the old home expense versus the new home expense is important as well. Will the new home have higher or lower utilities, for example? Will the new home have greater or less commuting or travel costs to visit loved ones, run errands, or getting to work? Consider insurance expenses, property taxes, HOA dues, and expenses before moving. The differences can be huge and surprising based on region,” says Elyse Foster, CFP®, senior wealth advisor / managing director at MAI Capital Management in Denver, Colorado.

Health Concerns

As you age, your health will become a determining factor in many decisions. If you or your spouse have mobility concerns, a two-story home may not be the best place to live. You can make accessibility accommodations, but the costs could be high.

On the other hand, if your current layout has fewer stairs or is all on one floor, widening a few doors for walkers isn’t that much compared to the costs of selling and moving.

Important

If you decide to rent your home, you’ll likely need to engage a management company, particularly if you’ve never been a landlord before.

The Middle Ground

If you’re not sure what to do, there is some middle ground to explore. Instead of selling, you could rent your home and move into something smaller, using the rental proceeds and banking the extra money. 

“Selling your home outright can cause major disturbances in your financial strategy. Always consider the alternative of leasing your home to good renters who will pay a premium for your asset. This allows you to be flexible with your retirement lifestyle. Whether you choose to move into an apartment or travel the world, you now have a new form of income,” says Timothy W. Hooker, AIF, co-founder and private wealth manager at Dynamic Wealth Solutions LLC in Southfield, Michigan.

If you decide to rent your home, consider using a management company, particularly if you don’t have experience as a landlord. However, even with the additional expense of a management company, it may still be better than paying selling costs, and you can continue to cash in on the rising value of your home.

You could also rent out a room or portion of your home, but this should be done with care, particularly if you rent to somebody you don’t know.

What Is Home Equity?

Home equity is the amount of ownership you have of your home. Home equity increases as you make more mortgage payments.

What Is Amortization?

With a mortgage, amortization is how the loan is paid off over time. An amortization calculator can show you the makeup of the payment at any given point in time: that is, how much of the payment is going towards interest, and how much is going towards the principal.

What’s the Average Mortgage in the U.S.?

For a 30-year fixed mortgage, the average payment is $2,715. For a 15-year fixed mortgage, the average payment is $3,552.

The Bottom Line

As a retiree, you hope to be able to make some choices about how you live that don’t center on money. If you love your home and all the memories it holds, you might decide to stay even when it does not make financial sense. 

The decision is a personal one. Crunch the numbers. Calculate the upfront costs of moving, and compare them to the yearly savings you’ll realize. A small gain probably isn’t worth the trouble, but substantial savings might make selling the best option.