Finances in Retirement - Investments

Downsizing Your Home in Retirement: Four Factors to Consider

by Alli Thomas

Oct 20, 2022

Many people consider downsizing their home as they approach or enter retirement. As with any significant life-changing decision, there are many factors to consider before you take action.  

Beyond the lifestyle aspects of downsizing from a large house to a smaller one (or to a condo/townhouse), there are potentially significant financial aspects that could make downsizing your home not worth it. 

Here are four questions to ask before you begin the downsizing process: 

What Will I Do with All My Stuff? 

Less square footage usually means less storage space. This is even more likely to apply if you’ll downsize your home from a house with a yard to a condo or townhouse without one. When you’ve spent a lifetime accumulating things, it can be surprisingly hard to part with your possessions as you try to simplify your life. Even for items you don’t mind getting rid of, you still have to decide what do with them. 

In the case of useful or valuable items, family and friends may be willing (and possibly eager) to take them off your hands. Useful items that your friends or family don’t want (or can’t take) can often be sold. If you have a garage and a driveway, the tried-and-true method of the garage/moving sale is an easy way to get rid of unwanted stuff. You can also use modern online marketplaces like OfferUp and Facebook Marketplace, but listing items can be time-consuming and would-be buyers unreliable.  

An easier option is donating items to charitable organizations like Goodwill or the Salvation Army. They accept a long list of items in exchange for a tax deduction and often will be willing to send a truck to your house to pick up your stuff, especially if you’re looking to donate something large like furniture. 

Then there’s the option of throwing it out. But this is can be emotionally difficult, especially with items that have sentimental value. 

Last but not least, you can rent a storage unit to put things you can’t or won’t get rid of, but won’t fit in the new downsize home. The downside is that the cost of renting a storage unit (and the insurance for it) will offset some of your downsizing savings.  

Read More: Four Ways to Give Your Home to Your Favorite Child

Will I Have to Pay Capital Gains Tax? 

If you make a profit on the sale of your home, you’re allowed to exclude up to $250,000 for single filers and up to $500,000 in capital gains for married couples filing jointly. 

You’ll have to figure out the difference between what your home’s sale price will be and what your cost basis – the purchase price you paid plus the cost of all permanent improvements you’ve made – is. 

There are a couple other catches.   

First, you must have lived and owned the home for two (non-consecutive) out of the last five years that ends on the date of sale.  

Second, you can only claim an exclusion every two years.  

Will Downsizing and Moving Cost Too Much? 

While a smaller home may mean paying less in utility bills and (perhaps) property taxes, you still need to factor in the costs associated with selling your home and buying a new one. Consider realtor commissions, closing costs, and moving expenses. These can add up quickly, and many people overlook them.  

Additionally, if you’ve lived in the same home for a long time in a state like California, where property tax increases are limited, you may see a significant property tax increase even if your new house is cheaper. Then there’s the potential expense of higher HOA dues for your new community.  

How Long Will I Be Able to Stay in My New Home? 

The optimal home configuration for you when you’re in your 80s may look VERY different from the place you downsize to when you’re in your 60s.  

One thing to be concerned about is stairs. 

When you’re younger and in good health, stairs aren’t a problem. 

But as you get older, there’s a good chance your mobility and vision situation may change, requiring another move or accessibility modifications. 

Elevators and parking distances can also be accessibility challenges. 

Keep that in mind when deciding on a property to downsize into.  

Don’t Make a Move Without a Plan 

Selling your house and moving is a big decision likely to come with significant costs and challenges. If you’re thinking of downsizing, making the move should be part of your financial plan.  

Be sure to discuss your housing plans with your financial advisor in advance to be aware in advance of the potential costs and risks of selling your home and downsizing. You may even be inspired to consider an alternative arrangement such as traveling in an RV or living on a houseboat.  

Don’t have an advisor or need a second opinion? Click here to set up an appointment with one of our financial advisors and get a review of your financial plan using our Results In Advance Planning method. 

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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