Is Downsizing Right for Your Retirement?

An older couple smile at each other as he holds a moving box and she holds a lamp. — (Image credit: Getty Images)

As you inch closer to retirement, you might be considering downsizing your home as a strategic move for your next phase of life. According to the National Association of Realtors, 29% of homebuyers 55 and older moved to downsize in 2023. While downsizing often provides substantial financial and lifestyle benefits, it's important to be aware of relevant considerations and challenges before making a final decision.

To ensure your plan aligns with your overall retirement strategy and goals, here are some considerations to be aware of when discussing downsizing with your spouse, adviser and family:

Financial incentives

For many retirees, downsizing presents an opportunity to unlock their home equity. Retirees who are selling a larger home and moving into a smaller one can potentially reduce their mortgage, taxes and operational and/or management costs considerably. Significantly reducing expenses can free up capital, which can then be reinvested toward other retirement goals. You can work with an adviser to determine the best use of that new capital and work out the best arrangement for your new living situation.

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Lifestyle benefits

Downsizing can align with your desire for a simpler, more manageable lifestyle. A smaller home (generally) requires less upkeep, which is appealing to those who do not want to spend their retirement years maintaining a larger property (and managing the expenses that come with it). This frees up time and capital, allowing you to prioritize activities you enjoy, such as traveling or spending more time with family.

When downsizing in retirement, consider choosing a home designed with accessibility in mind – such as a single-story property with walk-in showers, wider doorways and fewer steps. This can enhance safety, comfort and independence so that you can safely age in place.

The downsides

While downsizing offers numerous advantages, it’s crucial to consider potential drawbacks as well. Be mindful of the emotional toll that uprooting your life or family can have, as this aspect is often overlooked. After living in the same neighborhood for years or even decades and developing deep relationships with your community, changing ZIP codes alone may or may not be an option. In addition, sorting through years of memories and belongings might feel like an emotional rollercoaster. Give yourself grace and collaborate with your loved ones to come to a decision that feels best for you.

Additionally, while downsizing does offer financial benefits, there are some unforeseen expenses that go hand in hand with relocating to a new area. In some instances, property taxes may be more expensive than your previous home (even on a smaller house!). Utilities may also be more expensive in a new area. If you want to relocate states, the cost of moving should also be factored into the cost of downsizing.

It’s crucial to also consider the availability and cost of homeowners insurance in your new area. Due to recent natural disasters such as wildfires, floods and hurricanes, some regions have seen skyrocketing insurance premiums. Others have even become uninsurable. If you are not properly insured or are uninsured, that could create potentially large cash flow expenses in the future if something happens. This can significantly impact you if your plan is to live on a fixed income. Be sure to thoroughly research insurance options before committing to a move.

Cross-country moves can be costly. Work with a wealth manager or financial adviser to identify these unexpected expenses. This will help you better understand if downsizing is the right move for you.

How to make the right decision

The decision to downsize is a complex financial and emotional choice. While there is no right or wrong decision, approach it with a comprehensive view, considering both the immediate financial benefits and the long-term impact on your lifestyle, emotional well-being and overall retirement satisfaction. This holistic approach can help you to achieve the successful and fulfilling retirement you’ve been working toward.

By carefully weighing the pros and cons of downsizing, you can make an informed decision that aligns with your financial goals and lifestyle aspirations for retirement.

Neither Bailard nor any employee of Bailard can give tax or legal advice. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Lena joined Bailard in 2020 and serves as Vice President, Director of Financial Planning. In this role, she implements investment strategies, maintains client relationships and handles client financial planning needs. Prior to joining the firm, Lena spent 13 years at Wells Fargo as an Investment Manager implementing its Social Impact Investment strategies across client portfolios. Nine of those years were spent at Nelson Capital Management, a wholly owned subsidiary of Wells Fargo, as both an investment manager and financial planner. She has also worked as a Client Service Specialist at Charles Schwab and at a family-owned investment advisory firm.