Financial Benefits of Downsizing Your Home for Retirement

Housing is a major cost for homeowners at all ages and stages of life. The average American household spends over 33% of their total budget on housing. It’s no secret that bigger homes are more expensive, and not just due to the higher sales price. More square footage also usually translates to higher property taxes, insurance premiums, utility bills, and maintenance costs. 

Of course, a larger, more expensive home with extra bedrooms may be necessary during your working years, especially if you have children living at home. But many retirees find that downsizing their home gives them more freedom and flexibility with their finances, as well as their lifestyles.

In this article, we’re breaking down the financial benefits of downsizing your home for retirement and why relocating to a smaller home may be just the thing your retirement budget needs.

1. Reduced Housing Expenses

Lower Mortgage Payments

If you own a home and still have a mortgage, you may be able to significantly reduce your mortgage or eliminate it entirely by moving into a smaller home.

Smaller Utility Bills

The average American household spends $6,888 on utility bills every year. Larger homes need more electricity, more natural gas, and more AC. Moving to a smaller home can reduce your utility bills and save you money.

Decreased Property Taxes

Downsizing for retirement often means buying a home with a lower assessed value, which can reduce your property taxes. You can further reduce your tax burden if you choose to move to one of the states that have lower property tax rates.

Reduced Home Insurance Costs

In general, homeowners’ insurance tends to be cheaper for smaller homes with lower assessed values.

2. Increased Cash Flow

Profit From the Home Sale

Depending on how much home equity you’ve built up over the years, selling a larger home can yield a substantial profit. 

Not only can you use this profit to help you pay for your new, smaller home, but you can also use it for other purposes, such as investment or travel. Downsizing may also allow you to sell some of your furnishings and other belongings, which can bring in even more cash.

Opportunities for Other Investments

The money you gain or save each month from downsizing can be repurposed elsewhere in your investment portfolio on financial products such as:

• Stocks
• Bonds
• Exchange-traded funds (ETFs) and mutual funds
• Real-estate investment trusts (REITs)
• Annuities
• CDs
• High-yield savings accounts
• Investment properties

3. Lower Maintenance Costs

Home-maintenance costs can vary quite a bit, with the average homeowner spending about $6,000 annually on maintenance and repairs. Older, larger homes usually come with higher maintenance costs across the board. 

Downsizing in retirement can save you money on:

• Routine cleaning
• Yard work
• Inspections
• Repairs
• Upgrades and renovations

4. Tax Considerations

In many cases, downsizing your home during retirement offers some key tax benefits, including:

• The Capital Gains Exclusion: If you have a capital gain as a result of selling your primary residence, you may qualify to exclude up to $250,000 (individuals) or $500,000 (couples) of this gain from your taxable income when you file.
• Lower Overall Tax Burden: In addition to the capital gains exclusion, you may be able to reduce your overall tax burden, especially if you move to a state with lower tax rates compared to your current residence.
• Property Taxes – You may have bought your home decades ago and due to CA Proposition 13 your tax property tax base may be fairly low compared to fair market value of your home. Selling your property and moving to a home of equal or lesser value may allow you to keep your tax base. However, it is advisable you talk to a qualified attorney before doing so. 

5. Financial Freedom

For most of us, the transition into retirement involves some shifting of our lifestyles, goals, priorities, and circumstances. Many retirees see downsizing their homes as a way to secure the financial freedom they need to truly enjoy their golden years.

You may choose to use this newfound financial freedom on things like:

• Traveling: Moving to a smaller home can leave you with more money to fund your retirement travels.
• Family expenses or gifts: Do you hope to contribute to family members’ college funds or take your kids and grandkids out to eat more often?
• Charitable giving: More money in your pocket every month can give you the chance to contribute more to causes that matter to you.
• Joining clubs and activities: Reducing your housing costs can give you extra funds to enroll in classes, join clubs, learn new hobbies, and try other new activities.

6. The Chance to Relocate

Downsizing isn’t always just about moving to a smaller home and spending less on housing every month. Many retirees also choose to relocate to an area that has a lower cost of living. 

The cost of living varies significantly by state. If you live in a very expensive area, moving to a state with a lower cost of living may allow you to stretch your retirement savings much further. Moving to an area that’s in closer proximity to amenities can also help reduce transportation costs.

7. The Opportunity to Age in Place

One of the most important reasons to consider downsizing to a smaller house is that it may allow you to age in place. The vast majority of Americans over 50 say they wish to remain in their private residences as opposed to assisted-living facilities as they grow older. 

Not only does aging in place give you more freedom and independence as you age, but it can also save you money on the often-substantial costs associated with long-term care. Smaller, single-story homes are generally better suited to long-term aging in place. 

Moving to a smaller home or even building an ADU on a family member’s property can give you the financial and practical freedom to age in place in the future if you choose.

Secure a Comfortable, Prosperous, and Fulfilling Retirement

Retirement is a significant achievement and an exciting milestone in your life. It’s a chance to kick back and relax, explore your interests and passions, and spend quality time with the people you love. Whether you plan to downsize or not, a strong retirement plan that prioritizes your unique financial goals, priorities, and concerns is essential to a successful, stress-free retirement.

At Chatterton & Associates, we care deeply about the financial security and wellbeing of our clients and their families. We love hearing about their stories, wishes, values, and goals, and we’re honored to be part of their retirement journeys. We can help you create a comprehensive plan and apply time-tested financial strategies to help you achieve your ideal retirement.

Sincerely,

The Team at Chatterton & Associates