Benefits of Downsizing in Retirement

Blog posted On April 12, 2018

As a large share of the population approaches retirement, one of the recurring debates is whether or not to downsize.  Americans are living longer than previous generations, and with that comes more expenses for medical, travel, and cost of living.  These expenses combined with the upkeep and maintenance of a large home could easily exceed retirement savings.  To ensure a more financially comfortable retirement, many Americans are choosing to downsize from larger homes to smaller homes.  TD Ameritrade reports 42% of Americans plan on downsizing when they retire. 

Today, many retirees will live thirty years or longer in full or partial retirement.  Only 6% of those surveyed by TD Ameritrade plan on moving into a senior living community.  Downsizing to a smaller home is one way to reduce expenses and improve quality of living. 

Since most homes tend to appreciate over time, chances are a retiree’s current home has increased significantly in value since it was purchased.  With limited for sale inventory, homes in many metros around the country have experienced steep home price appreciation, especially in the past decade.  Retirees who choose to sell their current homes may see a significant profit, that in turn can be used toward the purchase of a smaller home or other investments.  This profit may be subject to taxation, and it is best to discuss selling a home with a financial advisor to determine what will and will not be taxed based on the location and situation.  If retirees are choosing to move farther away from family and friends, they should factor in travel expenses and any changes in state and local taxes. 

Retirees who consider renting an apartment or condo rather than purchasing a smaller home face the challenge of reentering the rental market.  The allure of no more lawn care, snow removal, or exterior maintenance may not outweigh the volatility of renting for the next thirty years or more.  While rent tends to go up each year, most mortgage payments will stay the same, depending on the loan.  Additionally, renters will cease building equity in an appreciating asset, like homeowners do.  Purchasing a condo or other multi-family unit may be a better option than renting for retirees who want to eliminate maintenance work but continue to build equity. 

Every financial situation is different, so before choosing to downsize it is best to consult a financial advisor to appropriately compare the benefits and risks of this major move. 

Sources: Fox Business