Three Steps for Evaluating a Downsize in Retirement

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Editor's note: This is the first of a two-part series. Part two is Seven Financial Considerations When Downsizing for Retirement.

During COVID, I had two clients sell their Washington, D.C.-area homes to move to Florida. Within 12 months, they had sold their Florida homes to re-buy in D.C.

It turned out the place they vacationed wasn't quite the same when you don't get to eat out every meal and you must endure a Florida summer.

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The cost? Capital gains taxes, transfer taxes and agent commissions ate into about 20% of the home equity each client had built.

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Research, including The Harvard Study of Adult Development and the University of Michigan Health and Retirement Study, dives into the drivers of happiness in retirement. Most studies find physical and emotional health, social relationships and financial security to be highly correlated with retiree contentment.

When thinking about possibly downsizing or moving, it's helpful to use these three components of happiness in retirement as the basis for your decision framework. Let's break the thought process down.

1. Health factors to consider in a move

About two years after my clients' ill-conceived moves, a good family friend relocated from Maryland to Texas. Our friend had some pre-existing health conditions, and it turned out to be harder than expected to replace their network of doctors in Maryland.

I don't know if this would have caused them to change their decision, but frequent trips back to the Old Line State for care proved to be costly and stressful.

Physical and mental health are often considered to be the No. 1 driver of retirement happiness. But this is not just about where your doctors are. It's being in a place that allows you to maintain your health and age well.

Are there good places to walk (to maintain mobility)? Is there easy access to public transportation and ride-sharing apps?

Grandkids top all when it comes to a retirement relocation. As a parent of three young kids with local grandparents, I am very thankful for this.

However, you need to also consider where your friends are, especially those who are in a similar life stage, and whether you can make new friends easily.

The trouble with evaluating a relocation based purely on kids and grandkids is that they are probably in their busiest stage … just as you are entering your least busy stage.

Once- or twice-a-week meet-ups are great, but they won't fill your schedule. Unless, of course, you are providing daycare.

Continuing care retirement communities (CCRCs) tend to be easy places to find friends as there is a large cohort of folks living and playing bridge together. Think college, but 60 years later.

There are also what are often referred to as naturally occurring retirement communities (NORCs), which are exactly what they sound like. These condo buildings don't have age restrictions but have naturally become majority retirees.

3. Cost: Try not to make it your top deciding factor

Imagine joining a pool that's half the cost of the one down the street. The problem with the cheaper pool is that you don't have any friends there and it's too deep for you to stand.

If you can afford the more expensive pool with the shallow side and friends, it probably makes sense to pay up.

I often advise clients not to move primarily based on cost unless it's necessary. Said differently, I believe health and social relationships matter more.

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Of course, once you do decide to move, you will want to take cost into consideration. At that point you should know that cost is not just cost of housing, although that's the big one.

You also need to consider state income taxes, property taxes, taxation of retirement distributions and estate taxes.

We tend to rely on financial planning software to get an idea of how much more you can spend per month if you move to a lower-cost area. If you're interested, you can access a free version of that software.

Our tax planning software allows us to change the state return and see how much more or less your state income taxes would be if you moved. Unfortunately, there's no free version of that one.

In part two (link in the Editor's Note above), I dig deeper into how to evaluate the most important cost considerations. Hold your breath.

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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After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.