One of America’s largest demographics, the Baby Boomer generation, continues to retire at a record-setting pace, with over 11,000 retiring each day. Many will opt to downsize in retirement, reducing expenses but bringing its own challenges.
According to a May 2024 reader survey, one in four Southern Living consumers plan to retire within the next 10 years, while two in four currently plan to downsize at some point in their retirement.
If you are considering doing the same, here’s what you need to take into consideration before scaling back your lifestyle.
Key Takeaways
- Downsizing may or may not be ideal based on certain market conditions.
- A full financial analysis can help you decide whether to downsize your living situation.
- The emotional and psychological impact of downsizing, including the difficulty of leaving a long-term home, is a significant consideration.
- Proper planning and consideration of alternatives are crucial steps before deciding to downsize.
- Consulting with a financial advisor is recommended to assess how downsizing fits into one’s overall retirement plan.
What Does It Mean To Downsize for Retirement?
Downsizing for retirement usually involves moving into a smaller home or a property. In some cases, it could mean moving to a smaller home, which you’d purchase or even rent.
In other cases, it could mean moving into an apartment, mobile home, tiny home, or even more transient living options like an RV or boat. In either case, retirees mostly seek smaller financial burdens with a more manageable space requiring less time and maintenance commitment.
Pros of Downsizing for Retirement
Lower Costs
Perhaps one of the most attractive benefits of downsizing is the potential to save money on living expenses. Selling a more expensive home and moving to a smaller house in an area with a lower cost of living may enable retirees to live without a mortgage, as well as reduce other costs.
41%
The share of homeowners between the ages of 65 and 79 who have a mortgage on their primary home as of 2022.
Smaller living spaces require less maintenance and operation costs, so retirees can lower their utility bills, property taxes, and insurance, translating to substantially lower living costs in retirement—a huge help for those living on limited incomes.
Less Maintenance
Retirement is supposed to be a season of rest and relaxation, with many hoping to spend their golden years doing things they enjoy. For some retirees, tending to homeownership responsibilities can disrupt that plan. With less home to manage, retirees can devote their time to hobbies, travel, and spending time with loved ones instead of being bogged down by keeping house.
Opportunities for a New and Easier Lifestyle
Downsizing can bring an element of simplicity and flexibility many look forward to experiencing in retirement. For some, smaller spaces lead to less clutter and a relatively stress-free environment. For others, a smaller space may be easier to vacate for travel and extended excursions. This may allow for more opportunities to live in a new location, move closer to family, or reside in a community with like-minded individuals in a similar phase in life.
Cons of Downsizing for Retirement
Market Conditions Matter
Though conventional wisdom suggests downsizing can be a good move for many retirees, depending on the location and local real estate market conditions, it may not be a great idea for everyone.
Christopher Totaro is a real estate agent with Coldwell Banker Warburg in New York City. He said, “Capital gains tax is a consideration when downsizing. …[T]he capital gains tax credit for a primary residence is $250,000 per spouse. If you purchased a home for $200,000 and sell it for $1,500,000, there may be capital gains tax you have to pay.”
Peter Everi of Utopia Property Management further explained how market conditions could affect plans to downsize, “One reason it might not be a good idea to downsize is that you simply wouldn’t get the same bang for your buck with a smaller house in this market. We are still experiencing a tight deadlock in the market with high interest rates and low inventory. You might be able to sell your house for a good amount, but the amount you will need to afford your new home will not be as small as you would expect.”
Further Tax Implications
Even if you don’t get hit with capital gains tax on the sale of your home, you may be on the hook for other taxes after your move. Consider income taxes, property taxes, sales taxes, and excise taxes in your new location. If you plan to move to another state, find out whether that state taxes Social Security benefits or retirement income from pensions, 401(k)s, or IRAs.
Warning
State law will also factor into your estate planning. As of 2024, 12 states and the District of Columbia have an estate tax on the books, while six states impose an inheritance tax. Maryland levies both an estate tax and an inheritance tax.
Emotional and Psychological Impact
It can be difficult to leave if you’ve lived in a home for many years. For one, it may involve decluttering your space, which is time-consuming and may be emotionally draining. Getting rid of family heirlooms and special keepsakes has its own set of emotional challenges that can be difficult to face.
Costs and Complications
Although many people have done this before, the process presents plenty of costs and complications–some of which may come as a shock if you haven’t moved in years. Plan for moving expenses, legal fees, and closing costs on your new home.
Adjustment Period
With any move, there will always be an adjustment period. This will include grieving a life in a time and place that no longer exists. Also, it means adjusting to a new environment and potentially re-learning how to get around and joining new social circles.
Lack of Space and Storage
Downsizing can mean less space to keep stuff. In this case, retirees may need to be more selective about their belongings. This can be difficult for retirees with certain hobbies if there needs to be more room to accommodate items pertinent to their favorite pastimes. Though transitioning to a smaller space fosters a simpler lifestyle, it may also challenge people to be more selective about their belongings and related activities.
Loss of Social Connections
The loss of social connections is more than just from moving from one place to another. It can also be related to having less space for others.
For seniors used to hosting friends and families, smaller digs may make this practice more difficult or extremely unconformable. In addition, the need to establish new social connections may leave those in their golden years feeling lonely and isolated in a smaller home.
Factors To Consider To Decide if Downsizing Is Right for You
Is the Housing Market Conducive to a Move?
Market conditions play an important role in determining the best time to downsize. A strong seller’s market can lead to higher home values, making it potentially profitable to sell a larger home and move into a smaller, more affordable space.
However, if retirees find themselves in a buyer’s market, where inventory is high and demand is low, they may need help to sell their homes for a decent price, resulting in financial loss. Also, fluctuating interest rates can impact retirees’ buying power. Potential buyers may face steep monthly payments on new mortgages in a high-interest-rate environment, even for smaller homes.
What’s Your Financial Situation?
If downsizing means you may not profit as much on the sale of your home, yet you’ll tack on a lot more debt to your personal balance sheet, you should consider the consequences of this move. If you’ve currently got a lot of high-interest debt and or have an otherwise tenuous financial situation, downsizing may not help you very much.
Would a Downsizing Move Make Sense for Your Personal Circumstances?
Though you may save money on maintenance and housing costs, what are the other implications of your move? If you’re farther away from friends and family or quality healthcare options and amenities, the trade-off may not be worth it.
Kris Mullins, chief marketing officer at Capital Max, an investment advisory firm in Boca Raton, Florida, said that retirees should also consider their financial legacy when downsizing, “In addition, without a strategic approach, downsizing can unintentionally disrupt your estate planning and potentially diminish the legacy you intend to leave behind. This is where financial advisors often see clients getting tripped up—by not fully appreciating the broader tax landscape.”
Alternatives to Downsizing
- Home renovations: Consider renovating your existing home to create a more functional space that suits your needs as you age.
- Co-living arrangements: Look into co-housing communities or shared living situations.
- Home sharing: Move in with friends or family members.
- Renting: Consider renting out your current home and moving to a smaller, more manageable property that you rent without homeownership responsibilities.
- Second properties: Maintain your primary residence while purchasing a smaller vacation home or secondary property for seasonal living or rental income.
- Financial planning: Consult with a financial advisor to explore investment strategies that can provide supplementary income, like reverse mortgages, HELOCs, etc.
Steps To Take Before Downsizing
- Create a vision of your preferred retirement lifestyle, including important features like climate, location, languages spoken, and cost of living.
- Determine your living costs in retirement, including lodging, food, healthcare, transportation, travel, and other discretionary spending.
- Research locations that offer at least 80% of what you’re looking for within your budget. Make a shortlist of these options.
- Visit three to five of the places on your shortlist. Connect with real estate agents, local neighborhood groups, and communities to ask questions and get the “lay of the land.”
- Finalize your chosen location and begin your pre-move activities, such as financial planning, decluttering, packing, and confirming travel arrangements.
- Plan a target moving date that accommodates the sale of your home and the purchase (or rental) of a new home.
Choosing the Right Home for Retirement
Choosing a new home for retirement is all about personal preference. Consider important factors that will give you the quality of life you envision. Budget is important, but so is the location.
Look for areas offering convenient access to essential services such as healthcare, grocery stores, and recreational activities to encourage social interaction. If proximity to family and friends or space to accommodate your hobbies is important, add this to your list of considerations. The goal is to find a home that meets your practical needs and enriches your retirement experience.
What Are Other Ways To Cut back on Expenses in Retirement?
To cut back on expenses in retirement, consider reducing nonessential spending, using public transportation, shopping for discounts, exploring part-time work, and reevaluating all spending to save on monthly costs.
What Is the Best Age To Downsize Your Home?
The best age to downsize your home is whenever you feel that you don’t need as much space and would look forward to reducing the responsibilities that come with homeownership. A Zillow report found that the median age was 55 for buyers who downsize to a smaller home.
What Is the Best Country To Retire?
Though there are plenty of retirement destinations to choose from, you should explore locations that offer an ideal mix of your preferred climate, lifestyle, cost of living, taxation schemes, cultural norms, and amenities.
The Bottom Line
Downsizing can be a great option for retirees hoping to simplify their lives and reduce expenses. However, it still requires careful consideration of personal circumstances and market conditions. Taking the time to plan thoroughly and thoughtfully can help almost anyone transition into retirement life with ease.