Finance

Homeowner’s Guide to Downsizing for Retirement

February 22, 2023

Last year, 51% of retirees in America chose to downsize their homes.¹ Why is this such a popular move? There are many pros and cons of downsizing. Downsizing to a smaller home can significantly reduce the financial and emotional toll of caring for a larger home. This helps free up your precious time to actually enjoy retirement.

However, this process can be complicated without a solid and informed plan of action. That’s where we can lend some help.

No matter your financial situation, downsizing should be a possibility to help you make the most of your retirement. Our all-inclusive guide will go over the necessary steps you should take to downsize for retirement, as well as your options for carving a stable path to a cozier, smaller space.

When Should You Downsize for Retirement?

Ever wondered when to downsize your home? At 62 years old? Or 65? Or maybe 71? When it comes to retirement, there’s really no “correct” age. Similarly, there’s no right age to downsize your home for retirement—but there are certain life markers that signal you may be ready.

Downsizing is often primarily a financial choice, but it can also be related to emotional, physical, and lifestyle needs. If retirement is close on your horizon, these signs could indicate it’s time to downsize:

Your home expenses exceed 30% of your monthly income – If your current home expenses take up more than 30% of your monthly income, the US Department of Housing and Urban Development (HUD) would consider you “financially burdened.”² A smaller property may be more affordable and sustainable in the long run.

Your home is high maintenance – Large homes come with a laundry list of needs, from lawn care to paint jobs. In retirement, you may wish to avoid this home maintenance burden in order to save money or reduce your physical labor.

Your home doesn’t fit your lifestyle – As people age, that steep driveway, second-floor primary bedroom, or rail-free stairway can become a hazard. Downsizing to a safer and more accident-averse home could save you stress, injuries, and money. Additionally, certain rooms like garages, the bedrooms of grown children, or offices may become untouched in retirement, so a smaller home with fewer rooms can help you minimize wasted space.

You need cash to prepare for retirement – Retirement isn’t exactly cheap. On average, monthly expenses cost $4,345 for retirees ages 65 and older.³ Converting your current home equity into income with a sale-leaseback program can help you prepare for retirement by freeing up cash to pay down debt or fund your next home search.

Your family or friends are far away – When you retire, you suddenly have more free time to enjoy with friends and family—that is, if they’re nearby. Downsizing could be an excellent chance to move closer to your loved ones.

Advantages of Downsizing for Retirement

Downsizing your living space may sound like a hefty project—and it is. However, the long-term benefits of this move usually outweigh the work or costs it can create. There are many unexpected benefits of downsizing your home, but the top advantages of downsizing as a future or current retiree may include:⁴

Lower maintenance costs, including reduced lawn care, repairs, and other work
Cheaper utility bills, particularly for heat, air conditioning, and electricity
More free time due to a home that requires less maintenance and care
Safer living conditions, such as wider hallways, wheelchair access, or shower hand bars
Greater cash flow from selling a home or property
Lower property taxes due to living inside a lower-value home
A more desirable living environment, if you choose to relocate

Preparing for Downsizing

Downsizing could be the key to a positive and stable retirement—but like any home relocation, it requires significant preparation.

To downsize successfully, you’ll need to collect as much information as possible on your current and future finances, home conditions, and preferences. Build your best path to downsizing by asking these essential questions.

What Are Your Current Home Costs vs. Your Projected Home Costs?

For many retirees, the main goal of downsizing is to save money. Even if not, you still want to make sure the process doesn’t cost you. When planning to downsize, consider how these common home ownership expenses would affect your budget:

Mortgage – While smaller homes usually have a lower mortgage than larger homes, home location and quality can boost the mortgage value. If you’re moving into a small but luxurious home in a high-demand area, you might end up with a higher mortgage than before.

Utilities – A smaller home in Florida may cost less in heating, but it could raise your electricity costs for air conditioning. See how your new home would impact any utility costs for heating, electricity, gas, and other services.

Maintenance – Downsizing often lowers your maintenance costs, since smaller homes have less to fix. However, make sure your new home is in good condition. Otherwise, you may spend a lot on maintenance.

Property taxes – Depending on where you move, your property taxes (and other taxes like sales tax or income tax) may shift severely. Always factor your future home’s state and local tax laws into your budget.

HOA fees – In 2021, over half of all homeowners lived in a community with a Homeowners Association (HOA).⁵These associations charge monthly fees (ranging from $100 to $700) on all properties within a community in exchange for services and amenities, such as lawn care or watering systems.

What Will It Cost to Sell Your Home?

You’d think that selling your home for a smaller one would mean pure profits. But selling a home can actually be quite expensive. Factor these potential home selling costs into your overall budget for downsizing:⁶

Early mortgage fees – You may incur a penalty fee for paying off your mortgage early.

Realtor commission – If you work with a realtor, you’ll likely need to pay a commission fee for realty agent services (4%–6% of the sale price).

Closing costs – These are fees paid to either real estate agents or lease takeover programs that are usually a small percentage of your home’s final sale price.

Home inspection and maintenance – Be sure to budget for costs of professional home inspections and any subsequent home repairs to prove your home’s quality condition.

Capital gains tax – You may also owe taxes on any profits from selling your home at a higher price than you bought it for (with exclusions for profits up to $250,000 for individuals or $500,000 for joint-filing couples).

How Will You Sell Your Home?

Whether you’re downsizing or simply moving, selling your home is a marathon of tasks and checklists—and that may take some help. Consider which of these selling options best fits your expertise and needs:

Realtors – If you’re looking to sell as soon as possible and have few financial worries, a listing agent may be your solution. While pricey, real estate agents can help you navigate your local market to find a suitable buyer.

Sale-leaseback programs – Need some time to financially or logistically prepare for downsizing? In a sale-leaseback program, an investor buys your property and then leases it back to you for a set period of time. This means you receive your current home’s equity during the lease, giving you time and cash to find a new home for downsizing. If you need to free up cash but prefer not to move, you may also be able to sell your home, stay in it, and buy it back when you’re able.

For sale by owner – If you are incredibly confident and experienced in your local real estate market, then you could list your own property for sale. However, this will leave every task up to you, from home appraisal to showings, and often still requires the help of professionals like inspectors and attorneys.

Choosing the Right Home

A job is only one factor in your living location. When retired, you want a home that works for your lifestyle and needs beyond work. Consider these downsizing tips for empty nesters and retirees when searching for a downsized homes:

Size – Downsizing implies that you’ll be living in a smaller home—but just how small? To determine your space needs, decide if you want to live in a single-family home, condominium, apartment, or even an assisted living community.

Location – Your retirement location should make life easy and enjoyable, not more difficult. Make sure your destination meets your needs for errands (shopping, medical facilities, etc.), entertainment, family proximity, safety, and weather.

Safety – The older you get, the more your body may need support. Consider homes with senior safety features like grab bars in the bathroom, non-slip flooring, wide doorways, and zero-step entries.

Community – Life doesn’t end at retirement—in fact, it’s just the beginning of an exciting new stage. To maintain an active social life, you may be interested in residences with multiple units (like condo buildings) or towns with active community centers.

Making the Move

You’ve set up the “SOLD” sign. You’ve placed the down payment. Now, it’s time to make your big (or small) move into downsizing to a more suitable property. So, where to start?

If there’s one rule about downsizing, it’s that your storage space is about to shrink—and that means you need to do some serious planning. As early as possible, pare down your belongings with these handy tips:

Start early so you have time to sort, reduce, and pack your belongings
Create a timeline for every step, such as packing certain rooms or dropping donations
Donate any low-value or common items you don’t want to keep, like clothing, books, or old electronics
Sell any high-value or specialty items like furniture, jewelry, or kitchenware
Pack efficiently, using sturdy materials and labels for every box
Hire movers, particularly if you have heavy items or more than a carload of belongings
Update your address with your bank, post office, and any government institutions
Create a new home layout to easily set up your belongings

Streamline Downsizing for Retirement with a Sale-Leaseback

Residential sale-leaseback programs are becoming a popular option for homeowners looking to downsize for retirement. They allow homeowners to sell their current home and continue living in it as a renter, while receiving a significant portion of their home equity in cash. This can provide financial support for the move and give homeowners time to find the perfect new home. By exploring residential sale-leaseback options, homeowners can make their transition into retirement a more manageable and stress-free experience.

Key Takeaways

Downsizing is an excellent way to transition your lifestyle and finances for retirement. To downsize successfully, you’ll need to assess your current financial situation, home needs, selling costs, and belongings.

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