When Should Retirees Downsize Their Homes?

Should you downsize your home when you retire? The answer depends on your individual circumstances. For example, factors to consider are the related costs, intangibles (such as freeing up cash that you might need for travel), and health issues. Weighing all the factors will help you to decide if downsizing is the best decision. 

Factors Influencing the Downsizing Decision

Most people fresh out of school, or newly married with little money, live in a basic apartment or cracker-box starter house. Over time, as individuals become families, and their income grows, a multi-bedroom home becomes the residence of choice. Later in life, children move out, and the home is filled with memories rather than people. 

Typically, at this point, there is no longer a need to pay the expenses that come with a large home. Once retired, individuals and couples often live on less income, and making their money last is a serious concern. However, letting go of a family home is not an easy decision.

“Downsizing is both a financial as well as an emotional decision,” says Allan Katz, CFP, ChFC, CLU, owner, and founder of Comprehensive Wealth Management Group 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 is not always the case.

Home Downsizing: Costs of Selling

Selling your home comes with some significant expenses. You may have to update your home to get the best price, and you could lose up to around 6% in realtor commissions. If you make enough money in the sale, capital gains taxes could take a big bite out of your earnings. 

Home Downsizing: The Costs of Moving 

Then you have to purchase or rent somewhere new to live. If the new accommodation is much smaller, you might need less or smaller furniture. There are also all the costs that come with moving: closing costs, movers (this time you may need help with packing to spare your back), and other incidentals you may not anticipate.

Home Downsizing: Intangibles

Moving to a sunny climate may seem attractive, but it might mean having to leave lifelong friends, family, community, and doctors with whom you have built relationships over time. “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, founder of Strategic Wealth, LLC in Alpharetta, Ga.

When it comes to selling a family home, partly due to emotional attachment, many people think their house is worth more than it actually is. Before committing to the idea of selling, get a realistic view of the likely selling price with a few real estate agents, and consider having the house appraised.

The decision to sell requires totaling 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, or getting to work? Consider insurance expenses, property taxes, HOA dues, and expenses before moving. The differences can be huge and surprising based on region,” says Elyse Foster, CFP®, founding principal, Harbor Wealth Management in Denver, Colo.

Health Concerns

As you age, your health will become a determining factor in all decisions. If you (or your spouse) have mobility problems, a two-story home probably is not 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 are younger and thinking about aging parents (or looking ahead to being one), you could consider a home makeover upgrade using what is called universal design standards—designed for people in all stages of life, including those with disabilities. 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.

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 are not sure what to do, there is some 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, co-founder, investment manager, and chief compliance officer at Dynamic Wealth Solutions LLC in Southfield, Mich.

If you decide to rent your home, consider using a management company, particularly if you don’t have experience as a landlord. However, even with the additional expense of a management company, it may still be better than paying selling costs, and you can continue to cash in on the rising value of your home.

You could also rent out a room or portion of your home, but this should be done with care, particularly if you rent to somebody you don’t know. Research local ordinances concerning roommates, not just whether you can have one in your neighborhood, but what to do if you cannot evict one. 

Other Reasons to Sell

If you have paid off your home, trying to hold onto it without burdening yourself makes sense. However, sometimes selling is the best idea. If you plan to travel, you may only need a small place to call home. If you need extensive, ongoing medical care that your local or regional hospital cannot support, relocating 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 decide to stay even when it does not make financial sense. 

The decision is a personal one. 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 the trouble, but substantial savings might make selling the best option.