Downsizing for Retirement: Pros, Cons and Smart Choices

Retirement is a big goal. But sometimes, achieving it means thinking small(er) – at least when it comes to your home.

Downsizing can be a strategic move, potentially lowering expenses and unlocking home equity to bolster your retirement savings. In fact, a Merrill Lynch study found that 51% of retirees aged 50 and over move into smaller homes after retiring.

But while the benefits can be compelling, downsizing isn’t just a financial decision – it’s also a deeply personal one. Here’s what to consider as you weigh the pros and cons of downsizing and decide whether buying or renting is the right move for you.

Financial benefits

Downsizing often provides a welcome boost to your retirement finances. Selling a larger home and moving into a smaller one can reduce your mortgage (or eliminate it altogether), as well as lower property taxes, utility bills and maintenance costs.

This frees up capital that you can use to meet other retirement goals, like traveling, funding hobbies or boosting your savings.

If you’re unsure what to do, a financial adviser can help you determine the best use for this new equity and ensure your move supports your broader retirement plan. (Tip: Here's how to make the process of finding an adviser simpler.)

Lifestyle perks

A smaller home can mean a simpler, more manageable lifestyle. Less square footage often translates to less upkeep, giving you more time to focus on what truly matters – whether it’s spending time with family, exploring new interests or ticking destinations off your travel bucket list.

When downsizing, consider homes designed with accessibility in mind, such as single-story properties, walk-in showers or wider doorways. Features like these can make your home safer and more comfortable as you age, helping you stay independent longer.

Downsizing downsides to consider

Downsizing isn’t without its challenges. Moving can feel like uprooting your life, especially if you’ve lived in the same home or community for decades. Sorting through years of belongings and deciding what to keep can be an emotional journey, and leaving behind familiar neighbors and routines can take an adjustment.

Financially, there are potential hidden costs to downsizing. Property taxes in your new area might be higher, even for a smaller home. Moving out of state? Factor in the cost of hiring movers, setting up utilities and furnishing a new home. Don’t forget to investigate homeowners insurance – some areas are experiencing skyrocketing premiums due to natural disasters, and others are even uninsurable.

Know your location

Location matters when downsizing. Some retirees move closer to family, while others seek out warmer climates, lower costs of living or more active communities. When choosing a new location, think about:

• Proximity to family and friends.
• Access to healthcare and essential services.
• Cost of living, including property taxes and insurance premiums.
• Weather and climate preferences.
• Availability of activities and amenities that align with your lifestyle goals.

Downsize with a plan for the future

Think about how your needs might evolve over the next 10, 15 or 20 years.

• Does your new home have the accessibility features you might need as you age?
• Would it allow you to stay independent for as long as possible?
• If you plan to move again in the future, does the location make financial sense for reselling?

Renting vs. buying: What’s right for you?

If you’re downsizing, you’ll also need to decide whether to rent or buy. Each option has unique benefits and drawbacks.

• Renting: Renting provides flexibility – ideal if you’re unsure where you want to settle long-term or if you’re testing out a new city. It also eliminates the costs of homeownership, like maintenance and property taxes, which can be appealing in retirement. However, rents can increase over time, which could impact your budget.
• Buying: Purchasing a home allows you to build equity and provides a sense of permanence. It also offers stability, especially if you prefer to control your housing costs. That said, owning comes with ongoing expenses like property taxes, insurance and upkeep, so it’s essential to budget carefully.

To determine which option is best for you, think about your long-term goals, financial situation and lifestyle preferences.

Tax implications of downsizing

Downsizing may also have tax consequences to consider. For example:

• You may qualify for a capital gains tax exclusion on the sale of your primary residence, which allows you to exclude up to $250,000 (or $500,000 for married couples) of the profit.
• Property taxes in your new location might differ significantly from your current home.
• If you move to a new state, research how retirement income is taxed to avoid any surprises. (Tip: Learn the difference between capital gains and ordinary income taxes.)

A financial adviser or tax professional can help you understand these implications and incorporate them into your overall retirement strategy.

Practical steps to downsize

If you think downsizing for retirement is a smart move for you, here are a few tips to simplify the process:

1. Start early: Give yourself plenty of time to sort through your belongings to avoid feeling rushed.
2. Use the ‘one-year rule’: If you haven’t used an item in the past year, consider donating or selling it.
3. Work in stages: Tackle one room at a time to make the process manageable.
4. Seek professional help: Downsizing specialists and real estate agents with experience in retirement moves can make the transition much smoother.

Bottom line: Making the move with confidence

Downsizing is a big retirement decision with financial, emotional and lifestyle implications. By approaching it with a clear understanding of your goals and a comprehensive plan, you can turn this transition into an opportunity to enhance your retirement.

Curious if downsizing makes sense for you? Schedule a free consultation today and let’s explore your options.

At Advance Capital Management, we guide clients through life’s big (and small!) decisions – downsizing included. Together, we’ll create a personalized plan that aligns with your dreams and financial needs.