6 Myths About Downsizing in Retirement
Dreaming of selling your home, downsizing to a smaller one and investing the extra cash for income when you retire? The profit you pocket might be less than you expect. Here's why.
When you're thinking about retiring, downsizing could come to mind — swapping your big house for something smaller and more compact.
It's often seen as a smart move for retirees, but it's not for everyone. You might not have the funds, energy or interest to pack your belongings and move to something smaller, and that's OK. But if the idea truly suits you, downsizing can be a practical way to ease into retirement.
However, before you start boxing up the last 25-plus years of your life, don't buy into the common false narratives, such as expecting a big cash windfall from the sale or drastically slashing living costs — things that often don't hold up.
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Instead, approach your retirement planning with perspective and steer clear of these six myths.
Myth 1: Everyone downsizes in retirement
Not true. While many retirees choose to move into a smaller home when they retire, most stay put for a variety of reasons — including the cost of buying a new home, leaving years of memories and the relationships they’ve made with neighbors, among others.
Kelly Z Homes reports that 3.6 million baby boomers are expected to downsize by 2037, and 51% of retirees age 50-plus have already moved into smaller homes. That might be true, but among boomers who own homes, 54% say they never plan to sell the house they live in, according to a poll from Clever Real Estate.
Many states with a higher share of older adults, such as Florida and West Virginia, also see retirees staying rather than moving, often due to strong ties to the community, high housing costs, rising mortgage rates, pleasant weather and health or family ties.
Myth 2: You’ll see a significant financial gain
A paid-off mortgage might lead you to expect a substantial profit when selling your home, but that’s not always the case. Selling can be challenging, particularly if your home hasn’t been updated in some time, and you might not get enough to afford the skyrocketing price of new homes.
In the last several years, the housing market’s prices have soared. Add in a lack of new homes for sale and interest rates from 5% to 6% to the mix, and there seems to be little financial benefit to buying a new home. Redfin says the median price of a new home is now $398,771, down 0.37% year-over-year. The Fed lists the price at about $514,600, and Zillow puts it at $368,198.
Myth 3: Selling your stuff equals a cash windfall
Downsizing and thinking of holding a garage sale to offload furniture, extra dishes, knick-knacks and clothes? It might sound like a great plan, but when you factor in the hours spent pricing items, setting up tables and haggling with strangers to earn an average of $500 to $1,000, all that work might not be worth it.
If you'd rather skip the work and list your items on Facebook Marketplace, jot this down: Only 16% of Facebook users regularly shop or buy items from Facebook Marketplace.
Besides that, your stuff might be more valuable to you than to someone else, and sadly, it can be tough to find someone to take it off your hands. If you have unique pieces but aren’t sure of their value, have an expert evaluate them before putting them up for sale.
All things considered, you might earn a bit of extra cash, but selling your stuff likely won’t cover the cost of your move.
Myth 4: You won’t have to borrow to move
It’s tempting to daydream about how much cash you’ll pocket from selling your home. While you might get enough money to buy a smaller home outright, that’s not guaranteed in today’s housing market, and you might need a new mortgage to avoid tying up all your cash in the property.
To put that into perspective, let's say you purchase a $400,000 home and use the profit from your home sale for the 20% down payment. A 15-year mortgage at 5.25% would result in monthly principal and interest payments of approximately $2,577.
On top of that, you’d face closing costs, property taxes and possibly HOA fees, which can quickly add up. Depending on your location, taxes and insurance costs could be even higher, further increasing your expenses.
Quick tip: Don't discount the cost of moving itself. Less than 250 miles can cost around $600 to $5,000; a cross-country move can cost $12,000 or more.
Myth 5: You’ll have fewer living expenses
A small home in a high-cost city, such as San Francisco or New York, can cost more than a larger one in a rural area.
For instance, a 600-square-foot condo in a pricey neighborhood might exceed the price of a 2,000-square-foot house in a less expensive region. If a smaller home requires significant renovations to meet your needs, costs can increase even further, and smaller spaces could prompt you to spend more on items such as sheds or storage units, gym memberships and dining out if the home lacks sufficient space.
Smaller homes can appreciate more slowly in some markets, impacting long-term financial benefits, and it’s possible to pay thousands more in property taxes, depending on where you relocate.
In many cases, smaller homes could reduce some expenses, such as utilities, maintenance and insurance. However, location, lifestyle and customization needs can offset any real savings.
Myth 6: You won’t miss the extra space
Not to be a buzzkill, but transitioning from a 4,000-square-foot home to a 1,200-square-foot one requires major adjustments.
Choosing which furniture and family heirlooms to keep or pass to your children can be challenging. If your family lives out of state, accommodating their visits could also be a concern.
Rather than dramatically downsizing, say from a 3,000-square-foot home to a 1,000-square-foot home, you might consider a home that still offers enough space to entertain.
Downsizing in retirement — the choice is yours
It’s easy to fantasize about downsizing in retirement — less upkeep and fewer living expenses, a new town, friends and memories. It might be the right move for you.
If done correctly, downsizing can be a good idea, and you might walk away with a substantial amount of money from the sale of your current home.
A word of advice: Run the numbers before you start packing.
If you downsize too early, you might miss the opportunity to benefit from additional equity growth in your current home. Apart from that, holding onto your home could provide more flexibility later, such as renting it out for an extra influx of money each month.
Downsize or stay put; ultimately, the decision is yours.
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