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Is Downsizing for Retirement a Boost or Burden to Your Wallet?

Is Downsizing for Retirement a Boost or Burden to Your Wallet?

For seniors looking to boost their retirement savings targets or reduce their living costs, downsizing is a common solution. Yet less than 50% of retirees downsized in their last move, according to Merrill-Lynch’s Age Wave survey.

As of 2018, JPMorgan & Chase estimates that over 52% of baby boomers don’t ever plan on moving from their homes in retirement, highlighting the rising number of retirees who are questioning whether downsizing is actually the right solution for them. While it can be a good monetary retirement decision for some, it may not always be the best one.

Therefore, before you commit to selling your home and moving to a smaller place, it’s best to weigh the pros and cons financially.

A Smaller Home Can Save You Money In Cost And Maintenance

Most seniors are trying to save enough money to fund their retirement in general, and downsizing can be a straightforward solution. Homeowners looking to purchase a smaller home expect to pay less for it. In addition, by retirement age, most homeowners would have built up significant equity in the home and should have paid off the mortgage.

This means downsizing might mean the removal of a mortgage payment. However, it is not just the upfront cost that tends to be lower. A smaller home can be cheaper to maintain, which is very beneficial to a retiree’s reduced budget. It costs less in utility bills, such as heating and electricity, and keeping up with repairs tends to be easier.

Seniors moving into retirement communities also have the option of having these services done regularly for them. Research indicates that retirees currently spend $1,322 a month on housing, which is a large chunk of their income given that Social Security benefits typically average $1,461 a month. Unless you have sizable pension income, it makes sense to reduce housing costs any way you can, downsizing included.

Lower Cost Of Homes Can Mean Less In Taxes

A smaller home can mean less in property taxes paid annually. Property taxes are calculated using the market value of your home and the area’s assessment ratio. This means a lower market value could mean lower tax bills each year. Keep in mind that this is not always the case, however.

A smaller home does not always mean a lower market value and if you have been a long-time homeowner, you may be expected to pay capital gains tax when selling your old home. Up to $250,000 profit on a home sale is excluded for a single person, while a married or joint ownership benefits from a $500,000 exclusion by the IRS. Additionally, property tax calculations are governed by individual state regulations so it is worth it to do your research beforehand.

The Flipside: Prepping Your Home To Sell Has Hidden Costs

A common misconception by homeowners looking to downsize is that they seem to forget the process comes with its own additional costs. There are the costs of getting their current home ready for sale, including the cost of renovation and staging. For most retirees, their homes would have been a family home and owned for a reasonable amount of time. This means it would have some wear and tear.

Aging homes will also come with updating costs and the standard inspection and remediation of any fungi or asbestos. There are also estate agency and realtor costs, advertising and moving expenses. Homeowners spend an average of $21,000 preparing their homes for sale and closing costs alone average around $14,200 nationwide.

That number can rise dramatically according to location. For instance, in San Jose, Calif., closing costs can go up to $76,000. Finally, there are the costs of settling into your new home to account for, including the cost of new furnishings and any changes needed to support aging in place.

A Smaller Home Does Not Necessarily Mean Lower Costs

Downsizing to a smaller home does not always equate to the savings anticipated. Smaller homes tend to be high in demand as much of the population looks to buy similar-sized homes, including young professionals and families. With high demand, the process of finding a home and achieving the savings can become much more complicated.

In fact, homeowners ages 65 to 74 who downsized their homes, selling a $270,000 home typically, end up buying one costing $250,000 according to statistics released by realtor Zillow. In addition, with mortgage rates ticking upward steadily since 2018, the costs are continuously rising, particularly for the 44% of retirees still repaying mortgages. Therefore, seniors expecting to shave off a significant amount on their home costs should be prepared for a shock.

Moving to a smaller home in retirement may make sense for many reasons. It can increase your comfort, reduce your monthly expenditures and even allow you to achieve the goal of aging at home comfortably. However, when it comes to your wallet, downsizing is not always as cost-efficient as it may first seem. The key lies in planning ahead and doing your research, making it align with your current financial situation and future plans.