When should retirees downsize homes? That’s an inevitable question, because time stands still for nobody. Seasons of life change over time, and one day you’ll find yourself asking that question more seriously than today. Ultimately, the answer is based on your individual circumstances. Here are some things to consider when making the decision. (For more, see Real Estate Advice for Recent Retirees.)

Downsizing Your Home: Circumstances to Ponder

Most people fresh out of school – or newly married with little money – start in a bare-bones apartment. Over time, as a family grows in tandem with its income, a multi-bedroom house generally becomes the residence of choice. Later in life, the kids move out (one hopes), and the house is filled with more memories than people. Quite likely, there's no longer a need to pay the expenses that come with a large home. Once retirement fully sets in – and individuals or couples often live on less income – making their money last may become a serious concern.

“Downsizing is both a financial as well as an emotional decision,” says Allan Katz, CFP, ChFC, CLU, president of Comprehensive Wealth Management Group, LLC, in Staten Island, N.Y. “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’s not always the case.

The cost of selling. Selling your home comes with some pretty high costs. You’ll likely have to do some facelift/style updates to get the best price, you could have 6% or more in realtor commissions. If you make enough money in the sale, capital gains taxes could take a big bite out of your earnings.

The cost of moving. Then, you have to purchase or rent somewhere new to live. If the new place is much smaller, you might end up needing to buy smaller furniture instead of just using what you have. Then, there are all the costs that come with moving: closing costs, actual movers (and this time, you may need help with packing to spare your back), and many other incidentals that you won’t know about until you do it.

The intangibles. Maybe moving to a sunny climate seems like a dream come true, but you’re leaving lifelong friends, family, community and doctors with whom you’ve built relationships over time. The beach is nice, but having friends and family to spend time with is better – providing (of course!) that you actually like your friends and family. “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, president, Strategic Wealth, LLC, Alpharetta, Ga.

By the way, you probably think your house is worth more than it actually is, so make sure to check out the likely selling price with a few real estate agents, and maybe pay for a property appraisal, before committing to the change. Avoid the Downsides of Downsizing in Retirement will explain more.

All of this means one thing: You have to total 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, get to work? Consider insurance expense, property taxes, HOA dues and expenses before moving. The differences can be huge and surprising based on region,“ says Elyse Foster, CFP®, principal, Harbor Financial Group, Inc., Boulder, Colo.

That doesn't mean that you won't end up profiting: A study from Boston College’s Center for Retirement Research found that downsizing from a $250,000 home to a $150,000 home is likely to net you about $6,250 extra per year or $520 per month – a sizable sum for the average retiree. Numbers like these are purely hypothetical, though. You’ll have to calculate your own numbers to make an educated choice.

And that's all before you start thinking about health.

Health Concerns

As you age, your health will become a more determining factor in all decisions. If you (or your spouse) have mobility problems, a two-story home probably isn’t 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. If you’re younger and thinking about aging parents (or looking ahead to being one), do a home makeover upgrade using what are called universal design standards – designing for people in all stages of life. This will allow you to stay in your home for as long as you would like without having to make modifications for your later years.

More serious health concerns may be a reason for moving to some form of senior housing, of course, but that's not a downsizing issue.

The Middle Ground

If you're not sure what to do, there's a 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®, parther and chief compliance officer, Dynamic Wealth Solutions, LLC, Southfield, Mich.

You’ll probably need a management company, especially if you don’t have experience as a landlord. But even adding in that expense saves all of the costs of selling and allows you to continue cashing in on the rising value of your home. Obviously, don't do this if it won't raise enough extra cash – unless your other goal is testing out a new city or the need to live on a single floor.

You could also rent out a room or portion of your home, but you should tread lightly, especially if it’s somebody you don’t know. And study up on local ordinances about roommates – not just whether you can have one in your neighborhood, but what happens if you want to evict one. (How Renting Out Your Spare Room Can Backfire spells out some details.)

Other Reasons to Sell

If you’ve paid off your home, trying to hold onto it without burdening yourself makes sense. However, sometimes selling is still the best idea. If you plan to travel a lot, you may only need a small place to call home. If you need extensive, ongoing medical care that your local or regional hospital can't support, relocating also might be advised.

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 stay even if it makes little financial sense. Why? Because you can.

How do you know if you should sell? 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 your time, but a substantial savings might make sense. (For more, see 5 Reasons Retirees Are Upsizing Instead of Downsizing Their Homes and Downsize Your Home to Downsize Expenses).

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