Read This Before Downsizing Your Home for Retirement

While everyone has different reasons for downsizing a home later in life, many assume it will help finance a good chunk of retirement. Unfortunately, as homeowners often reap less than they had initially anticipated when considering this plan, some retirees are forced to make drastic changes to their envisioned retirement lifestyle.

If you plan on downsizing before or during retirement, consider taking the following steps to ensure your expectations align more closely with reality.

Properly assess the value of your current home

You can take several approaches to determine your home’s value; but remember that while an online estimator will spit out results in mere minutes, the corresponding accuracy isn’t always the best. For example, Zillow admits to a 7.49% median error rate for off-market homes, which can over or underestimate the value of your home. Therefore, it’s safe to assume—especially in areas outside of large cities with lower turnover rates—that the margin of error is pretty significant for these tools.

Thankfully, local real estate agents can provide a more accurate appraisal as they consider the assessed value, comparative sales, and any home features and upgrades an online algorithm cannot. You can also ask your realtor for strategies to maximize the value of your home.

For the most precise home valuation, however, hiring a professional appraiser is the way to go. While this may involve a significant upfront expense (the national average is $500 for a single-family home, per the National Association of Realtors), the benefits often outweigh the cost. A more accurate asking price can potentially lead to a quicker home sale, particularly in competitive markets.

Understand all costs associated with a home sale

After you obtain a realistic home value estimate, you’ll need to assess all costs associated with selling your home—including closing costs and taxes.

Keep in mind that following a home inspection, buyers can request modifications or repairs: meaning that in addition to cosmetic changes or upgrades, you may be responsible for costs to remedy pest damage or electrical, plumbing, roof, or foundation issues. It's therefore important to remain cautious and aware of potential financial implications associated with the same.

Closing costs—which, according to Bankrate.com, range anywhere from 2% to 7% of a home’s sale price—can include payment for the mortgage balance, property transfer taxes, recording fees, and attorney costs. You’ll also need to pay any real estate commissions at closing, up to 6% of the home’s sale price.

Understanding tax implications of a home sale is key. For example, it's good to know that most couples can exclude up to $500,000 in gains (profit) from their taxable income—depending on how long they’ve lived in the home and whether it was used as a primary residence. Click here to read more about capital gains and home sales.

Know what your new home will cost you

Buying a newly constructed home? How exciting! Remember, however, that costly add-ons (e.g., pools, bonus rooms, or floor upgrades) can significantly boost the price of your new abode beyond its base estimate. Moving into a new home community? In this case, it’s common for builders to charge a lower HOA fee initially to attract buyers—so budget appropriately.

Those moving into a community of existing home should also familiarize themselves with HOA fees, as the mismanagement of these funds isn’t too uncommon unfortunately; a smart idea is to obtain a list of fees from previous years to gauge how much they’ll continue to increase, also pinpointing any discussion of special assessments (extra fees charged when reserve funds fail to cover necessary repairs), which can adversely affect homeowner budgets.

Another important consideration? Just because you’re moving into a different home doesn’t mean you’ll avoid repairs and/or renovations down the road. For example, it’s important to remember that most houses aren’t designed with old age in mind. Therefore, if you require wheelchair accessibility or need to expand a bathroom or convert existing space so all key areas are on one level, related expenses can quickly pile up.

Finally, if you’re planning to take out a mortgage on your new home, downsizing savings may not be as much as you think—especially if you find yourself in a high-interest rate environment. You’ll therefore need to weigh your downsizing savings against the amount of interest you’ll pay over time with your new mortgage.

Downsize your belongings

Downsizing your home also means downsizing the stuff you’ll move into it. This is often an emotional process and, depending on how many sentimental items you own, can be quite overwhelming. It’s therefore best to start early and not rush. Begin with smaller items before moving on to furniture for rooms your new home may lack (e.g., a third bedroom or office).

This will also help minimize moving costs, which are hefty to begin with! Based on a move to a two-to-three-bedroom place, for example, Moving.com claims the average local move costs between $966 and $1,733. Long-distance moving costs (beyond 1,000 miles) for a similar home, meanwhile, can climb as high as $5,958. As you can see, moving isn’t inexpensive; so you’ll want to factor corresponding costs into your calculations while trimming down your contents.

Consider selling before you buy

It may make sense to sell your current home prior to downsizing, depending on your situation. Doing so will help avoid the temptation of settling for less than you would otherwise fetch given the lack of pressure to fund a new home closing and thus sidestepping the potential need for a bridge loan (a short-term loan, typically a few weeks), which is often difficult to obtain and very expensive.

If you’re moving to a new location, meanwhile—especially one you haven’t visited frequently for long periods—renting before buying is often a smart move. This strategy gives you the flexibility to pack up and head out should the new location not meet your expectations, empowering you to make the best decision for your future.

Downsizing and the potential impact on government programs

If you’re currently on Medicaid and plan on selling your home, know that the sale can impact your future benefits depending on your earnings—as you can’t exceed the program’s income and/or asset limit (note each state sets different eligibility limits). The same applies if you’re collecting supplemental security income (SSI). As selling your home while maintaining eligibility for these government programs is often complicated, seek guidance from a trusted financial advisor to feel confident in your decisions.

In sum: downsizing to help fund retirement

If you’re considering downsizing in the near future—primarily to fund a chunk of your retirement—it’s imperative to avoid any pitfalls that may cause you to reap less profit than anticipated.

Need expert guidance to help analyze your options? Our hourly consulting services are here to provide the confidence you need.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.