4 Things You Need To Know Before You Downsize In Retirement

Your home is a special place. 

Laughter, love, growing pains, and kitchen stains are woven within those walls. Memories trace the banister, rest in the thick molding whose faded pencil marks are a visible sign of your kids growing up, follow the kitchen table that’s seen one too many stains from dying eggs, decorating cookies, and sharing meals. You probably have enough images to color your mind for a lifetime. 

But as time goes on, the railing shows signs of age, the stairs creak, the second floor remains empty. When your kids move out and you are nearing retirement, it might not make sense to climb up and down the stairs each week to clean or pay the extra money to heat and cool the house. 

You might be thinking that it is time to downsize. Downsizing is a wonderful option for retirees but this decision should be made with care to ensure that you set yourself up for happiness in the future. We have put together a list of four questions to ask yourself to see if downsizing is the right move for you. 

1. What does downsizing mean to you?

Downsizing can mean different things to different people. It all depends on what you are looking for in a home. It might mean purchasing a new home either in a similar area or an entirely new one or it might be renting. This brings up another dilemma you’ll need to think about before you decide to move: will you rent or buy? 

There are positives and negatives with each option, it all depends on the right move for you. You should think about your retirement budget and cashflow, desired lifestyle, proximity to quality healthcare, and other amenities.

Homeownership can be lucrative as it allows you to build equity and have a place all your own but as you age, taking care of a house may not be the best option. Renting opens up those options for you. Whether you are looking for an apartment or condo, most buildings give you access to amenities like a pool, gym, and other activities. With renting, you also wouldn’t be on the hook for maintenance, property taxes, or home owner’s insurance. 

Take some time to evaluate the benefits and drawbacks of each option and decide which option will work best for your desired lifestyle in retirement. If you want to spend most of your time traveling or your family is scattered around, you might not want a mortgage tying you to one area. It is also important to look at the cost of a mortgage versus the cost of the rent. If you are looking to move into a ritzy apartment complex, your rent might actually be more expensive than you thought. Keep in mind that rent prices tend to increase year to year so be sure to factor that into your retirement budget. 

2. Do you know the costs?

It should come as no surprise that moving is expensive. But those expenses come from both sides of the equation, when you sell your house and when you move into your new residence. It is important that you fully understand all of the costs to ensure you free up your cash flow to the extent that you need/want. 

Costs to sell

Given the temporal, emotional, and monetary attachment, most people overestimate how much their home is actually worth. This causes them to think that they will have more money to spend on a new place or other aspects of their retirement life than they really do. So before you put a for sale sign in the yard, be sure you know what your house is worth. 

You can check online sites like Zillow and Realtor to provide a high-level estimate of your home’s value, check-in with a couple of real estate agents, and even hire an independent appraiser. This way you have a much better idea of the price you can realistically expect given the current real estate market. 

Since you’ve been in your home for many years, you will likely need to implement some upgrades to help it sell. Keep these updates simple and small like new paint, fresh landscaping, and decluttering. Larger remodels usually don’t get the return you are looking for and might not appeal to all buyers. 

If your home has significantly appreciated in value (kudos to you!) you might also need to pay capital gains on the sale of the home. Should you have a net gain of more than $500,000 for joint filers and $250,000 for single filers you will need to pay capital gains on the proceeds from the sale. But the IRS doesn’t make it as simple as subtracting the sale price from the original price you paid—don’t worry, the rules actually work in your favor. 

The amount you’ll pay in capital gains is the difference between the cost basis and the net proceeds. The cost basis is the amount you paid to purchase the house along with any acquisition costs or capital improvements and the net proceeds look at the total sales price minus closing costs and real estate fees.

That’s another cost to consider: real estate fees and commissions as well as any other costs for closing.

Exhausted yet? Now it’s time to evaluate the costs of moving into a new place. 

Costs to move

If downsizing for you means purchasing another property, you will have to factor in the costs of buying a new house including a mortgage, fees, property taxes, insurance, and potential HOA fees. Here are a couple of questions to ask yourself:

• Is the move in-state or out-of-state?
• What are the home values like in your new area?
• What is the projected home value down the line?
• Will this new area work for your budget and lifestyle considerations?

If you are going to downsize, make sure you really downsize. Not just 100 square feet, make it significant so that you really can save the money you are envisioning. A move from a 3,000 sqft house to a 2,500 sqft house might not save you that much money. Take a look at your needs moving forward and find a place that will best complement those needs.

3. Are you emotionally ready to downsize?

When you move to a smaller house, you will need to be economical in terms of the belongings you are able to bring. It might mean parting with a bedroom set or antique figurines, or other items that won’t work in your new space. This is a difficult process for many people. Here are a few things to keep in mind:

• Keep the things that really matter to you
• Digitize what you can
  • Photo albums and other prints from the years.
• Gift special items to your children or family members
  • This might be a family heirloom or other precious items.
• Have an estate sale
  • Hosting an estate sale is a great way to sell some of your larger items and can put some extra money in your pocket. 
• Donate to local charities or organizations

This can be an emotional process and that is okay. Be sure that you really take stock of the things you need and part with the things that you don’t.

4. Will the new house suit you in the long-term?

If you are downsizing from a two-story house, you probably don’t want to purchase another two-story or townhome with endless levels. Look for a place where you can see yourself long-term like no stairs, zero-entry showers, railings, etc. You’ll also want to make sure that your new home takes into consideration the following:

• Retirement budget and projected cash flow
• Lifestyle goals both now and in the future
• Easy access to quality healthcare
• Activities you enjoy
• Community
• Other amenities

Downsizing is an important decision so you want to make sure you evaluate it from all angles before making a move that you regret. By downsizing in the right way, you will be able to free up your cash flow and start building the retirement life you have been saving and planning for all of these years.

 Our team at Legacy Wealth is here to help you build your dream retirement. Ready to talk about downsizing in your retirement plan? Schedule a 15-minute call with our team today.