During my professional career, the topic of whether to “downsize” a home while planning for retirement often came up as a topic for consideration. In case you have never heard the term “downsizing your home”, it simply means moving from a larger home into something smaller and more manageable.
A common situation is that your children are grown and on their own (the empty nest syndrome) and you no longer need all those bedrooms, bathrooms, or the big backyard located in a preferred school district. The primary reason for downsizing is often to unlock the equity you have locked up in your home. By selling a larger home you have owned for a while, you likely could “cash-out” a significant amount of money to help fund retirement cash flow needs or to supplement your investment portfolio.
For decades now, and as accelerated during the Covid era, many homeowners in high-cost states like New York, Massachusetts, and other parts of the Northeast have sold their homes to gain access to their home equity for an all-cash purchase in Florida or other warmer climates. Due to the elevated real estate market in the Northeast, it is common to sell your family home, pay off your mortgage and other debts, and use your remaining equity to buy a mortgage-free, smaller, and newer home in a preferred climate.
An important tax sidenote: Depending on how long you have lived in your home, when you sell your primary residence, the first $250,000 (if you are a single filer) or $500,000 (if you are married filing jointly) of the net profit you make on your home sale may be exempt from capital gains taxes. If you have lived in your home for many years, and/or if you live in an expensive real estate market and expect to make more than those limits, you should consult your tax advisor to fully understand any capital gain taxes you may have to pay.
In addition to unlocking your equity, downsizing has many other attractive benefits:
- Focus on future needs: Like it or not, we are all getting older and our mobility and ability to use stairs and basements may change with time. When downsizing and changing homes, it makes sense to strongly consider a one level home. Additionally, a smaller property often eliminates unwanted and costly chores like yard work, snow removal, and heavy cleaning.
- Be closer to people and places: We all have different personal priorities, interests, and social circles. Downsizing and moving can make it possible for you to be closer to the activities you want to do. For example, you might move to a golf-course community, pickleball club neighborhood, or closer to the ocean. If you have children, or even more important, grandchildren, relocating while downsizing can cut down on the travel time needed to visit the people you care about.
- Decrease your expenses: Downsizing can also reduce your expenses and help to avoid future large capital expenses. Usually having a smaller home results in lower monthly expenses. Depending on where you choose to relocate will determine your costs. A smaller home in a warmer climate often reduces property taxes, utilities costs, and maintenance issues. If you have an older home, you will likely have large capital expenditures in your future, such as a new roof, windows, furnace, septic tank, and other updating. Moving into a new or at least newer home can help avoid some of those big-ticket items.
There are certainly many compelling reasons to consider downsizing your home as you approach or when you are in retirement. Before we end the discussion, let’s note a few of the more common obstacles or concerns people have when considering downsizing:
- Emotional: Selling and moving from a longtime family home with lots of memories can be emotionally taxing. While this will be different for everyone, to help cope with the emotional side of selling a family home and downsizing, one should try to view the process as a transition as “rightsizing” your life rather than just losing space. Remember that all stressors are not bad. Focus on the positive things about downsizing, and the starting of a new chapter of your life.
- Social Connections: Downsizing can mean leaving behind established neighbors and friends. To mitigate these effects, focus on both maintaining existing bonds and intentionally building a new local support system. Conduct an audit of those people you think you wish to stay connected with and write a plan to help you do so. With social media, it is often easier than you may think. Most retirees who downsize and move to a new community say it was easier than they anticipated to make new friends. This is especially true if you move to a retirement focused community.
- Too much Stress: Start by reevaluating your “why” for downsizing. If your reasons are valid, such as to relieve a financial strain, the home is too large and empty, or the desire to be in a warmer climate, try writing out a pro and con list. Stress can sometimes result from the challenge of managing material possessions accumulated over time. Many retirees find it helpful to start a systematic decluttering process by categorizing items into “keep, donate, sell, and trash”.
Ultimately, the decision to downsize and relocate can be a very positive financial strategy. For most of us, the logistics and decisions of what to do with a lifetime of belongings and saying goodbye to a familiar neighborhood can feel overwhelming; however, the rewards and excitement of a new adventure with increased financial freedom, reduced maintenance, and a home that truly fits your current stage of life are often well worth it. By being objective with the decision and seeking advice from a trusted real estate agent, financial advisor and those family and friends that have your best interest at heart, you can turn a stressful transition into a welcome new beginning.
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