Downsizing for retirement is a popular method to make your retirement years more comfortable and enjoyable. Whether you’re reorganizing your current home, donating unwanted items, or putting your house up for sale, downsizing for retirees can be an exciting time—however, it can also come with confusion, stress, and uncertainty.
If you’ve been noticing that your house is feeling a little bit large—and you want a fresh start—here’s a complete guide for how to downsize your home for retirement that covers financial planning, moving, and our best downsizing home for retirement tips.
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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:
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:
If you’re interested in downsizing for retirement, there are a number of costs, maintenance, and services associated with selling a house.
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.
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:
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.
You have several options when it comes to deciding on your moving plan:
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:
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:
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.
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.
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.
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:
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.