Six Myths About Downsizing in Retirement
Retirees might dream of selling their homes, downsizing to smaller ones and investing the extra cash for income, but the profit they pocket is often less than what they wished.
When you retire, you might hear a lot about downsizing — trading in your large house for something more compact.
It’s often pitched as the best move for retirees, but it’s not for everyone, and you might not have the cash or the desire to go smaller.
The idea might have even crossed your mind, but there are some myths and misconceptions about downsizing — especially how it could affect your finances or change your lifestyle. If it feels like the right fit for you, though, downsizing can be a practical way to ease into retirement.
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Before packing your belongings, avoid falling for false narratives, such as that selling will provide a significant financial gain or that your living expenses will be greatly reduced by downsizing.
Instead, approach your retirement planning with a distinct understanding of reality and steer clear of these six myths.
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 behind years of memories and the relationships they’ve made with neighbors, among others.
Although data changes over time, Kelly Z Homes reports that 3.6 million baby boomers are expected to downsize by 2037; 51% of retirees age 50-plus have already moved into smaller homes. It seems that the average age to downsize is 61, just shy of the average retirement age.
Many states with a higher share of older adults, such as Florida and West Virginia, 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.
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.
Additionally, Redfin reported in May that the U.S. median home price is now $440,892, up 0.6% from last year.
Even if you sell, you might need to use those profits to purchase another home.
3. Selling your stuff equals extra cash
Downsizing and thinking of holding a garage sale to offload furniture, extra dishes, knickknacks 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 probably won’t cover the cost of your move.
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 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, homeowners’ insurance, 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.
Don't discount the cost of moving itself.
5. You’ll have fewer living expenses
A small home in a high-cost city, such as San Francisco or New York City, 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 for these activities.
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.
On the flip side: In many cases, smaller homes could reduce such expenses as utilities, maintenance and insurance. However, location, lifestyle and customization needs can offset any real savings.
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 on to your children can be challenging. If your family lives out of state, accommodating their visits could also be a concern.
Rather than downsizing so dramatically, you might prefer a more manageable 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 for an extra influx of money each month.
Downsize or stay put; ultimately, the decision is yours.
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