As you inch closer to retirement, you might be considering downsizing your home as a strategic move for your next phase of life. According to the National Association of Realtors, 29% of homebuyers 55 and older moved to downsize in 2023. While downsizing often provides substantial financial and lifestyle benefits, it's important to be aware of relevant considerations and challenges before making a final decision.
To ensure your plan aligns with your overall retirement strategy and goals, here are some considerations to be aware of when discussing downsizing with your spouse, adviser and family:
Financial incentives
For many retirees, downsizing presents an opportunity to unlock their home equity. Retirees who are selling a larger home and moving into a smaller one can potentially reduce their mortgage, taxes and operational and/or management costs considerably. Significantly reducing expenses can free up capital, which can then be reinvested toward other retirement goals. You can work with an adviser to determine the best use of that new capital and work out the best arrangement for your new living situation.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Lifestyle benefits
Downsizing can align with your desire for a simpler, more manageable lifestyle. A smaller home (generally) requires less upkeep, which is appealing to those who do not want to spend their retirement years maintaining a larger property (and managing the expenses that come with it). This frees up time and capital, allowing you to prioritize activities you enjoy, such as traveling or spending more time with family.
When downsizing in retirement, consider choosing a home designed with accessibility in mind – such as a single-story property with walk-in showers, wider doorways and fewer steps. This can enhance safety, comfort and independence so that you can safely age in place.
The downsides
While downsizing offers numerous advantages, it’s crucial to consider potential drawbacks as well. Be mindful of the emotional toll that uprooting your life or family can have, as this aspect is often overlooked. After living in the same neighborhood for years or even decades and developing deep relationships with your community, changing ZIP codes alone may or may not be an option. In addition, sorting through years of memories and belongings might feel like an emotional rollercoaster. Give yourself grace and collaborate with your loved ones to come to a decision that feels best for you.
Additionally, while downsizing does offer financial benefits, there are some unforeseen expenses that go hand in hand with relocating to a new area. In some instances, property taxes may be more expensive than your previous home (even on a smaller house!). Utilities may also be more expensive in a new area. If you want to relocate states, the cost of moving should also be factored into the cost of downsizing.
It’s crucial to also consider the availability and cost of homeowners insurance in your new area. Due to recent natural disasters such as wildfires, floods and hurricanes, some regions have seen skyrocketing insurance premiums. Others have even become uninsurable. If you are not properly insured or are uninsured, that could create potentially large cash flow expenses in the future if something happens. This can significantly impact you if your plan is to live on a fixed income. Be sure to thoroughly research insurance options before committing to a move.
Cross-country moves can be costly. Work with a wealth manager or financial adviser to identify these unexpected expenses. This will help you better understand if downsizing is the right move for you.
How to make the right decision
The decision to downsize is a complex financial and emotional choice. While there is no right or wrong decision, approach it with a comprehensive view, considering both the immediate financial benefits and the long-term impact on your lifestyle, emotional well-being and overall retirement satisfaction. This holistic approach can help you to achieve the successful and fulfilling retirement you’ve been working toward.
By carefully weighing the pros and cons of downsizing, you can make an informed decision that aligns with your financial goals and lifestyle aspirations for retirement.
Neither Bailard nor any employee of Bailard can give tax or legal advice. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations.
Related Content
- Four Reasons to Rent When You Downsize for Retirement
- Four Reasons to Buy When You Downsize for Retirement
- Eight Tips to Declutter Your Home Before Your Retirement Move
- Should You Pay Cash When You Downsize? Here Are Three Scenarios
- 10 Things You Should Know About Selling Your Home to Downsize in Retirement
-
2025 Tax Reform: Will the SALT Deduction Cap Be Repealed?Tax Deductions Some lawmakers say it’s time to end the $10,000 cap on state and local tax deductions.
-
Affordability Crisis: Florida Votes to Increase Property Tax BreakState Tax Property taxes have skyrocketed nearly 60% within the last five years in Florida, and its constituents are finally doing something about it.
-
Average Net Worth by Age: How Do You Measure Up?Financial advisors discuss the secrets to growing your net worth over time.
-
Three Charitable Giving Strategies for High-Net-Worth IndividualsIf you have $1 million or more saved for retirement, these charitable giving strategies can help you give efficiently and save on taxes.
-
The Wealth-Building Powers of Health Savings Accounts (HSAs)Health savings accounts could be the most underutilized wealth-building tool out there. Here’s who should use them and how to maximize their benefits.
-
Seven Ways to Be an Absolute Jerk as a LawyerHere's what law students need to know about damaging their relationships with other lawyers and judges and running up the bill for clients.
-
Stock Market Today: Stocks Are Positively Mixed to Open DecemberTechnology led the way Monday as two of the three main equity indexes closed higher.
-
The Best Retail Stocks to Buy This Holiday SeasonE-commerce is a growing trend, but most folks still prefer to shop in stores. That makes these dominant retail stocks worth a closer look.
-
One Good Way to Withdraw Retirement Assets (and a Bad One)Don't withdraw retirement assets haphazardly. Managing distributions intentionally can lower your taxes, conserve your wealth and reduce Medicare premiums.
-
What Is Capital Gains Tax Deferral?Spoiler alert: It's the secret weapon of savvy real estate investors. Here's how it works and details about the tools you need to do it.
