Downsizing in Retirement - Trust Point

Downsizing in Retirement

Retired couple packing up boxes to downsize in retirement

One of the most important decisions you will make when you retire is where to live. For many retirees, this means trading their larger home for a smaller one. Whether you choose to downsize to a smaller, more modest house, or opt to move to an apartment or senior living community, it’s important that you weigh all the pros and cons first.

When evaluating your living situation in retirement, you should start by looking at your finances and establishing goals for this next chapter in your life. Do you want to travel a lot? Move to a warmer state? Have more financial freedom? Be closer to family? Have an idea of what your ideal life in retirement looks like, so you can determine if downsizing can help make it a reality.

Benefits of Downsizing

Maintaining a large home can be difficult for anyone, and it can become even more challenging as you age. From shoveling snow and tending to your lawn, to house maintenance and repair, keeping up a property is physically taxing, and can become expensive if you have to outsource the work. Downsizing can eliminate these issues, saving you time, money, and the physical toll that living on a larger property can take.

If you are looking to travel frequently during retirement, downsizing can be a much more cost effective for that lifestyle — why have a larger, more expensive home when you will only live there for a limited time? Downsizing in retirement can also provide important cash flow considerations. If you have lived in your home for two of the last five years, and your home has increased in value, you may be making a large profit when you sell your home to downsize. If this is the case, you can use your home equity toward paying for your next home, toward your retirement expenses, or you can invest it.

Rent or Buy

If you decide to downsize during retirement, you may want to consider renting a smaller home, condo, or apartment. Renting often can provide a lower cost of living, and can mean lower fees. For example, you likely won’t have to pay property taxes or homeowners association payments when living in a rental property. If you decide to rent in a retirement community, you’ll probably have more opportunities to get out, meet people and be active.

Whether you are leaning toward renting or toward buying, consult a financial advisor before making a decision, as they can help determine what choice is best for your current situation. You can also read our blog “Rent or Buy?” for more considerations to think about.

Potential Drawbacks

While downsizing offers a variety of benefits for retirees, you should also consider the potential challenges of downsizing. For starters, moving out of your home can be both physically and emotionally taxing. Moving itself is an extensive process, and requires a lot of labor and time, while costing you a lot of money depending on your needs. Most individuals who downsize can be faced with decisions on departing with many of their belongings, and leaving a home can be an incredibly emotional experience. Your house has sentimental value to you, and moving out of your community may be too distressing for it to be worth it.

In retirement, it’s important to work with a financial advisor to evaluate the housing market and to quantify how much you would benefit financially from downsizing. For example, if you have already paid off the mortgage of your home, it may not be the best decision for you to take on another one since you’ll want to take as little of the debt as possible into retirement.

There are also potential tax implications when you sell your home if it has appreciated over time. Married couples who file jointly and who have lived in their home for two of the last five years, are able to receive $500,000 in gain, tax free in 2023, when they sell their home. However, any profit outside of those parameters will trigger a capital gains tax. Whether or not downsizing is right for you, is really dependent on your own unique circumstances and on the state of the housing market.

Consult a Professional

Trust Point financial professionals are here to help you navigate the transition to retirement. Our team can help you determine if it is the right time to downsize, and work with you to weigh the benefits and drawbacks. Reach out to a Trust Point professional today to get started. Call 800-368-9474 or send us a message.

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