Downsizing for Retirement: A Complete Guide

According to a 2018 TD Ameritrade survey, 42 percent of Americans plan on downsizing after retirement—and it’s easy to see why. Downsizing allows retirees to lower their financial obligations and move to a new area perfect for living out their golden years.

If you are questioning, “should you downsize in retirement?” here are some of the most common retirement downsizing benefits and reasons:

• Enjoy a new location: Have you always wanted to enjoy a tropical retirement? Or maybe you’ve dreamed of retiring from your demanding career and settling in the middle of an idyllic forest or woodlands? Regardless of your reasons, if you’re ready for a new location to call home, take some time to consider your motivations for moving—and where you’d like to enjoy your golden years.
• A more practical living environment: If you decide to move to a smaller home, you’ll have less extra space to worry about. No more spending entire weekends cleaning the house—instead, you’ll have the space you need and nothing else. Downsizing your home for retirement often makes daily chores and home maintenance feel much more manageable and gives you some time back into your day.
• A cheaper mortgage: Is your current home paid off? If not, downsizing in retirement to a new home and a lower monthly mortgage can be an appealing—and even exciting—option. Free up some expenses in your budget and you might just find some extra cash for vacationing or spoiling your grandchildren.
• Lower utility bills: If you decide to downsize into a smaller space, you’ll probably immediately notice the benefits of a lower utility cost. Plus, if you’ve been living in an older home—one that might not have the most current and energy-efficient appliances or windows—a new home might mean saving even more money every month.
• Increase your cash flow: When you sell your home and downsize for retirement, you’ll likely receive a windfall of cash after your home sells. This is the perfect time to boost your retirement savings or even invest in something you’ve always wanted—a boat or a new car if it makes financial sense to you.
• Being close to family: Do you live near your family and friends at the moment? If not, maybe you’ve decided to downsize and move closer to your loved ones so you can cherish the time spent together throughout your golden years. There’s often nothing better than spending time with your grandchildren.
• Access to better medical care: As you age, you’ll likely want to ensure you have all the medical care necessary to make your golden years carefree and comfortable. If you’re currently living in an area that doesn’t have a thriving medical system—or even access to the specialists you need—you might consider moving to a new area that offers enhanced healthcare options.
• Enjoy a lower cost of living: Maximize your retirement savings and move to an area with a lower cost of living. If you’re currently living in a city or town that has a high cost of living, moving to a more budget-friendly area can lift a huge weight off your pocketbook. Plus, you can also consider areas that are particularly tax-friendly for retirees—something that’s great to keep in mind.

In order to make financially-informed decisions when downsizing for retirement, there are a number of important considerations to account for. Whether you’re downsizing your home in retirement for a better financial future, to be closer to family, or to have access to better medical care, downsizing for retirement includes a number of critical financial decisions.

The first step of how to start downsizing for retirement is to review your finances. To start the process, consider the two following questions:

• What is your monthly housing budget? How much can you realistically afford to pay for your new home? Include fees for maintenance, utilities, taxes, renovations, and any upcoming projects. And don’t forget to factor in lifestyle components as well: Will you travel to see family or will they live nearby?
• What’s your ideal financial situation? If you’re nearing retirement age and you’re not where you want to be financially, now is the perfect time to assess what’s possible—and pursue new ways to ensure you’re able to live out your dreams during your golden years.

Costs Associated with Selling a House

If you’re interested in downsizing for retirement, there are a number of costs, maintenance, and services associated with selling a house.

• Your real estate agent: As you begin to consider downsizing for retirement, hiring a realtor is an important step. Although it can be tempting to save money on fees by doing it yourself, it’s often much more challenging to sell your home on your own. In fact, it’s typically recommended that you meet with multiple realtors before you pick one—to make sure you’ve found the right one for you. In today’s world, the standard commission for a real estate agent is about 6 percent of the home’s price. Depending on the price of your home, this can be a fair amount of money—so be aware of how much you’ll have to pay to support your real estate agent.
• Repairs and maintenance on your home: Depending on the condition of your home, potential buyers may request specific maintenance requests or repairs to elevate the overall condition of the space before putting in an offer or moving in. Take a look around your home and see if there are any potentially large repairs that you should include in your budget.
• Professional cleaning services: Lastly, remember to factor in professional cleaning services to do a deep clean once you’ve moved out—and your new owners are ready to start their life there.

Capital Gains Tax and Government Benefit Impacts

Capital Gains Tax

Selling your home and downsizing in retirement can impact your capital gains tax and government benefit impacts. The IRS and many states across the U.S. levy a “capital gains tax” on the difference between what you paid for your home and what you end up selling it for.

Luckily, there’s an exemption that applies to many seniors: You can exclude up to $250,000 of capital gains if you’re single, and $500,000 if you’re married and file taxes jointly. All of this means that if you purchased your home in the 1990s for $150,000 and you sell it today for $250,000, you won’t owe any capital gains tax.

These exemptions won’t apply, however, if the house isn’t your primary residence or if you haven’t lived in it for two out of the last five years. If you have any questions on the complexities of capital gains tax, refer to your financial advisor or your real estate agent for clarity.

Government Benefit Impacts

By owning your current home, you’ll still be able to freely collect government benefits—such as Medicaid or Social Security Income. However, if you sell your home and it boosts your income, the extra cash flow may suddenly disqualify you from these government benefits. Reviewing how the sale of your current house can impact your benefits may assist you with deciding between selling and downsizing your home before retirement, or waiting to downsize your home after retirement.

Here’s how it works: In order to keep your Medicaid coverage, you must have less than $2,000 in countable assets—and selling your home will likely result in more than $2,000. To ensure that your Medicaid coverage remains intact, all proceeds from the sale must be legally spent or protected by the end of the following month.

To make sure your Social Security Income coverage remains, you have three months to buy a new home after the sale of your previous one—if you do this, and still have less than $2,000 in your bank accounts, your SSI benefits will continue without an issue.

Costs Associated with Purchasing a New House

When you choose to downsize in retirement and move into a smaller home, there may be new costs associated with your purchase. Keep these in mind as you decide on your next move:

• Homeowners Association Fees (HOAs): If you choose to downsize and move into a neighborhood, townhome, or just a community that has a homeowners association, you’ll have to pay the fees. HOA fees tend to vary widely depending on the services and amenities the HOA provides.
• Property Tax and Home Insurance: Moving into a smaller home doesn’t necessarily mean that you’ll be saving money on your insurance or property tax—it actually depends on your location. Plus, there are a variety of external factors such as crime rates and natural hazards that can increase your insurance premiums. Do a bit of compare and contrast with different insurance agencies to determine what’s the best deal for your new home.
• Real Estate Agent Costs: When buying a home with the help of a realtor, you’ll also have to pay approximately 6 percent of the home sale to the agent for their assistance. Make sure you keep this cost in mind as you consider the costs associated with purchasing a new home.

Costs Associated with Moving

Moving can be an expensive endeavor—from renting a moving truck to hiring full-service movers and purchasing new items for the new home, downsizing in your retirement comes with a number of moving-related costs to get you from point A to point B.

Moving Costs

You have several options when it comes to deciding on your moving plan:

• Moving Truck Rentals: The classic picture of moving, renting a U-Haul or similar type of truck, is a great option if you have to drive a long distance or if you prefer to save money by moving on your own. The cost depends on how far you’re traveling, the size of the truck, and the cost of gas. If you go this route, you’ll want to make sure you have enough help with loading and unloading all of your belongings, and maybe some assistance with the drive, depending on how far you’re going.
• Moving Company: When you hire a moving company, you can decide if you want them to move all of your items or just a select few. This can be a great way to mitigate any worries about moving heavy or cumbersome objects—such as your bed or dining room table. You can hire a moving company to help with these options and transport them to your new home.
• Full-Service Movers: If you don’t want to have to move a single box, choosing full-service movers is the best option for you. Although this is certainly the priciest way to move, it’s definitely the easiest—and it’s one that will allow you to relax and get ready for your new home.

Cost of Living in Your New Area

Downsizing for retirement comes with a set of financial benefits—so you’ll need to double-check that the overall cost of living in your area isn’t appropriately out of line with your overall budget. Once you’ve determined the new area you want to move in, do a bit of research to determine the following:

• Availability and Cost of Healthcare: Depending on your health, you may want to move to a community that offers accessible and affordable health care—particularly if there are specialists that you’d like to have in your area.
• Taxes: When moving to a new county or state, consider the income and sales tax. Some states vary drastically and you won’t want to suddenly have to pay a large difference in taxes.
• Overall Cost of Living: Outside of housing, healthcare and transportation costs will cost you the most in your retirement years. CNN Money has a convenient cost of living calculator that will provide details on the differences between your current city and your new area.

Consider Renting a House

Renting a house in your retirement can be a great option if you’re wanting to downsize without purchasing a new home. Depending on the area you’d like to move to, renting a home during your retirement years can be a financially-astute decision.

Moving is never easy—but with plenty of proper preparation, you can make your move seamless and even stress-free. Here are our top tips for downsizing for retirement and preparing for your new move:

Go Room by Room

Craft a strategy for your packing list and start in the rooms you use the least. These are typically the easiest to declutter and go through, piece by piece. Remember that you won’t finish everything in one weekend—instead, downsizing can take up to a year to fully complete. Be gentle with yourself as you downsize.

During this time, it’s also helpful to make a note of the size and layout of the home you plan to move into—so you can downsize each room in your current home accordingly.

Sell and Donate Your Items

As you prepare to downsize for retirement, selling or donating items that you no longer want or need can be a great option. Identify what furniture and appliances you’d like to bring to your new home—and make a list of what you’d like to sell. Then, take a look at Craigslist, Facebook Marketplace, or Nextdoor and add your items to these sites to place them up for sale in your community.

Getting rid of your long-loved items can feel emotionally tolling. So if you can’t bear to sell off some of your favorite items, consider donating them instead. To share your items with someone in need, consider local or national charities, such as Salvation Army or Goodwill.

Digitize Memorabilia

As you go through the process of downsizing for retirement, you’ll likely find yourself interacting with decades of memorabilia—and spending much of your time going down memory lane. Sorting through old family photos and keepsakes can be a great opportunity to start digitizing your family memorabilia.

With the power of today’s technology, many of your family’s nearest and dearest memories can be uploaded to “the cloud”—so you won’t have to necessarily bring everything to your new home. You can transfer family photo books or childhood art to a computer, VHS tapes to CDs, or even donate your physical VHS and cassette tapes to your local charity and opt for the online streaming versions instead.

Downsizing for retirement doesn’t necessarily mean that you must move! It might be as simple as downsizing your belongings and your responsibilities to make life easier, more comfortable, and gain confidence in your financial situation.

• Rent Out a Room in Your House: If moving to a new location isn’t the right option for you but you’re seeking increased financial independence, consider renting out one of your rooms or converting your property to dual occupancy. A lease payment can help increase your monthly income. Before accepting a tenant, however, make sure you consult a legal advisor to help draft a simple lease agreement and answer questions you may have about the leasing process.
• Consider Reverse Mortgages: Another option if you’re looking to downsize during your retirement years without moving is to consider a reverse mortgage. For seniors over the age of 62, this allows you to stay in your home while drawing on the equity that you’ve built. With this option, however, there’s both risk and long-term financial impact—so ask your financial advisor if this is the most strategic option for you.
• Do a Deep Declutter: When you’ve lived in the same house for years—or even decades!—doing a deep declutter is a great idea. Take note of what items you’d like to sell and what items you’d like to donate. With the extra cash, you can reinvest in your home or simply save for the future.

Downsizing in retirement is a huge moment in your life as a senior—especially if you’ve spent decades of your life in one home or neighborhood.

To navigate the feelings that accompany an upcoming downsize, here are our favorite tips for downsizing after retirement:

• Start Slow: Don’t stress yourself out by doing too much at once. Take it day by day and allow yourself to start slow. Moving is already an inherently stressful experience and when you have to downsize on top of that, it can make a difficult task feel impossible. Remember that you won’t be able to finish going through all of your items within a few days or even weeks—so set aside enough time to do the job well and without too much stress. Some seniors start downsizing over the course of one or even two years, giving you adequate time to process the new changes in your life.
• Make a Schedule: One of the easiest ways to stay on track is to create a schedule. Once you’ve decided that you’re ready to start downsizing for retirement, start putting together a calendar or a schedule—and hold yourself to it, just as you would an appointment or a meeting. Give yourself specific times to spend on certain areas of your home or certain tasks associated with your downsizing, such as “From 9am until noon, I am going to post extra furniture on Facebook Marketplace.” Procrastinating on your downsize will ultimately cost you more stress—so follow through on your schedule and it will become easier with time!
• Be Ruthless but Gentle: Downsizing for retirees often means encountering a lifetime of memories—and you may feel sad, emotional, grief-stricken, and anxious. If a particular item has been part of your home for most of your life, it can be incredibly difficult to say goodbye. As you go through your items, be gentle with yourself. Talk with your dearest friends and family members and consider inviting them over so you can go through your sentimental items together and share fond memories. If you’re feeling unbearably stressed about parting with your items and downsizing for retirement, you might also consider the support of a therapist. Letting go of your history can feel like grieving—and it’s perfectly okay to recognize this and understand that these feelings are normal.

Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.