Guide to Downsizing for Retirees

Are you ready to downsize? Consider these tips if you’re a retiree thinking of downsizing.

If you’ve recently retired or are approaching retirement, chances are you’ve given some thought into downsizing your home. There are many reasons retirees choose to downsize. These include being able to free up money for retirement expenses or to reduce the amount of home maintenance required. Downsizing can also add freedom and flexibility to a retirement lifestyle.

No matter which situation applies to you, there are certain unique factors to consider when downsizing for retirees. Understanding your best option means considering your finances, desired lifestyle, and demographics.

Consideration #1: Will your financing be enough to carry you throughout retirement?

The impact of the coronavirus left a large chunk of the population financially vulnerable. Particularly for retirees or those looking to retire, the volatility of the stock market causes a huge concern for personal investments. Many who are relying on their investments to carry them through retirement need to reconsider their financial planning.

A best practice is to enter retirement having no mortgage debt, but the reality is that many people at age 65 and over have a mortgage. If you still owe on your home, finding a less expensive place to live may help you lower your housing costs and free up more budget for other expenses. By downsizing, you have the potential of reducing or even eliminating your mortgage.

But remember that in many geographies, home prices have most likely risen since your last purchase. So you’ll have to seriously consider how much you’re willing to downsize in order to live mortgage-free. You’ll also need to consider the added costs of buying and selling a home, moving, and possible increases in taxes.

Consideration #2: What kind of retirement lifestyle do you want to live?

As the average lifespan continues to rise, many Americans may outlive their savings. Given this uncertainty, you might need to re-evaluate your lifestyle to determine the best way to allocate your finances.

Consider what’s most important to you in a retirement lifestyle. Perhaps you’d like to travel more, or pursue new hobbies. Downsizing for retirees can be a great way to free up more capital, while allowing you the flexibility to finance other aspects of your retirement. At the same time, it’s important to budget accordingly so that you don’t risk overspending on non-fixed expenses.

Not only does downsizing free up finances for leisure activities, it also extends to activities that you don’t want to continue into your retirement lifestyle. Less square footage and fewer bedrooms mean you don’t have to spend as much time cleaning, or furnishing. You can search for a home that will meet your long-term needs. For many, this includes fewer stairs, wider hallways, and other accessibility features.

Consideration #3: Where do you want to live?

Downsizing provides a great opportunity for you to focus on what’s important to you as you grow older. Maybe you’ve always wanted to live closer to friends and family, or perhaps moving to a warmer climate is appealing.

While downsizing for retirees provides the flexibility to make geographical changes, it’s important to consider how relocating will affect your quality of life.

Before making the decision to leave your current home, you’ll need to decide what demographic factors are non-negotiable. Some questions you may want to ask yourself include:

  • Does my new home allow easy access to healthcare, transit, and my other day-to-day necessities like grocery shopping?
  • Is a strong sense of community important to me in a new neighborhood?
  • Will I feel safe in the new neighborhood?

Consideration #4: How much will downsizing cost you?

While there are plenty of benefits to downsizing, there can also be a lot of expenses involved. To help you understand how much downsizing could actually cost you, here are some of the typical costs associated with selling and buying a new home:

  • Taxes: There are several factors involved in determining the final amount, but ultimately, you should prepare yourself to pay at least some taxes on the money you make from the sale of your home.
  • Moving expenses: In addition to paying for temporary accommodation as you transition between homes, you’ll also need to hire a moving company, and potentially a storage company if you’re unable to fit all your furnishings in the new home.
  • Real estate agent fees: If you’re using a real estate agent to sell your home, you’ll have to pay a commission fee, which is typically equivalent to about five or six percent of the home’s sale price.
  • Transaction costs: Selling a house the traditional way will require you to pay closing fees and potentially concessions and other administrative costs.

Common tools to help with downsizing for retirees

With all these added costs, downsizing can be more expensive than expected for many retirees. To help finance a new home, many retirees use a reverse mortgage, which is a loan that anyone over the age of 62 can use as financial assistance during retirement.

But use caution. A reverse mortgage can be complicated, as it functions in the opposite way of a traditional mortgage. It doesn’t require the homeowner to make monthly payments. Instead, the funds don’t need to be repaid until the homeowner leaves the home, usually by selling the house. Some consumers find that a reverse mortgage erodes equity and prevents them from leaving an asset to their heirs.

Other options include taking out a home equity line of credit (HELOC) or refinancing the mortgage. These could be useful if you face large-scale or unexpected medical expenses, home repairs, or any other type of emergency. By taking from a HELOC, you can leave your retirement savings and investments in place. Refinancing gives the option to take advantage of low mortgage rates.

However, each of these options comes with its own pitfalls. As you get closer to retirement, you’ll want to beware of any financial arrangement that increases your debt burden and makes it harder for you to live comfortably off what’s likely your biggest asset, your house.

A few final thoughts

Downsizing for retirees may be a great way to manage finances while living the desired retirement lifestyle. However, making the decision to downsize your home can be very difficult when considering all the factors (and expenses) involved. You’ll want to make sure to do your research, speak to financial experts, and reflect on how you want to spend the rest of your life.

Finally, if you’re looking to use your home to raise capital, consider selling your house for cash to an off-market homebuyer. A cash sale is an easy, fast, and convenient way to sell a house. This option allows you to pay no fees while letting someone else handle all the paperwork.

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Kyle Spearin

Kyle is Sundae's Real Estate Editor. As both an investor and content marketing professional, Kyle combines his passion for real estate investing and educational background with his love of helping others. His experience with real estate tech companies, including contributing to BiggerPockets Pro, gives him insight into markets across the United States.