As seniors journey into and through their retirement years, a significant number of them will seriously contemplate the advantages of downsizing – selling that oversized two-story house where you raised the kids and spending the (considerable) profit on a smaller, tidier, easier to maintain and cheaper to own house in the community of your dreams.
It’s a tempting vision, and for many seniors it represents the best way to maintain independence and live within their means in an environment better suited for aging in place.
But that idyllic picture doesn’t tell the whole story – and like anything else connected with retirement, clear-eyed planning is needed before your dreams of downsizing cause you to make hasty decisions.
Why Downsizing Costs Can Exceed Initial Expectations
In this perceptive New York Times article, reporter Susan Garland uses the example of a couple living in the Pacific Northwest to highlight a basic reality: the decision to sell a home and downsize doesn’t come without hidden, unexpected costs and delays. The message is not that downsizing is a bad idea – but it’s a big step that requires preparation and foresight.
We first brought you this article a few years back, but this week as we focus on Housing, we’re talking another look. Please note that a subscription is required to access the New York Times article.
Garland begins with the story of two couples, Louise and Charles Kiss from Washington State, and Dale and Marion Boyd from Georgia. Both were caught off guard by the intricacies of the housing market, but for opposite reasons.
The Kisses decided to downsize in 2018 by selling their four-bedroom split-level house in Bellevue, a Seattle suburb, and moving to a two-bedroom unit at a continuing care facility. It seemed like the perfect plan – at first.
Navigating Unexpected Renovation and Transition Expenses
But the financial headaches piled up fast. Garland writes, “Despite the hot Seattle-area housing market, their house did not sell until they spent $20,000 to remove the popcorn ceilings and renovate the kitchen. The delay in getting money from the sale forced them to take out a bridge loan to pay the community’s hefty entrance fee on their new apartment.”
For the Boyds, the story was a bit different. Instead of a delay, they put their four-bedroom ranch house in Georgia up for sale thinking they would have time to find a new place during the period while the listing was active. The house sold in one day.
Garland writes, “Two weeks later, [the Boyds] placed much of their furniture in storage and moved to a rental house, where they lived for nine months, at $2,000 a month. In the meantime, they signed a contract for a house that had not yet been built. They moved into it in July.” That’s a lot of added stress, storage costs, and rent money wasted.
Conducting a Housing Market Reality Check Before Selling
While frustrating, these challenges can usually be avoided by doing a bit of research into the housing market before you leap to downsize.
“Older homeowners should consult with several real estate agents and appraisers to get a realistic picture of what their house might sell for and what smaller homes might cost,” Garland writes. “This is particularly important to do right now. Though local markets differ, empty nesters hoping to make a killing on the sale of the family home may be disappointed.”
She adds that stubbornly high mortgage rates and an unsettled stock market are making it more difficult for younger home seekers with families to afford the down payment and monthly payments for larger family-sized homes. Moreover, older buyers are now competing with other retirees – and with younger buyers without kids – for smaller, less expensive houses.
Calculating Real Downsizing Savings and Hidden Fees
Seniors also need to be honest about how much they expect to save by downsizing.
In the Times piece, Garland writes, “In addition to determining sales prices, homeowners could figure out possible savings by comparing the expenses expected at a new place with those at their current place, experts say. One often overlooked line item for sellers: closing costs, which could reach between 8 percent and 10 percent of the sales price, according to the real estate website Zillow.”
Those costs typically include a 6 percent real estate agent commission, though sellers could try to negotiate a reduction to that charge. Garland adds that moving costs and home staging, such as new paint, floors or remodeling, will also eat into profits.
Managing HOA Fees, Assessments, and Relocation Taxes
It’s important to remember monthly fees in your budget if you’re hoping to move into a condominium or an independent home in planned retirement communities.
“These homeowners association fees pay for security, grounds maintenance and amenities such as pools and fitness rooms. They are generally not tax-deductible and can range from $100 to more than $1,000 a month,” Garland explains.
Garland stresses that it’s vital for buyers to find out in detail – and in writing – what the HOA dues and fees cover in full. “In some communities, for instance, they do not cover lawn care or parking,” she warns.
We might add that condo buyers need to find out if there are any assessments planned for major repairs. Replacement of a roof, for example, can cost every condo owner in a complex many thousands of dollars in unplanned costs.
If part of your plan to downsize involves relocating to a new state, there’s another obvious consideration: taxes.
“States vary on how they tax retirement income, and property taxes differ by locality,” Garland explains. “Even if your new house is smaller than your old one, your property taxes may not drop, depending on the new home’s value and its tax rate.”
We wrote about some important considerations regarding moving in retirement in this Blog article published last fall.
Planning for Capital Gains Taxes and Strategic Sale Timing
One of the biggest tax bites you may have to face is one that is often overlooked: capital gains.
“If your house has appreciated significantly over the years,” Garland writes, “capital gains taxes could crimp cash proceeds from a sale. Homeowners who have owned and lived in their home for at least two of the five years before the sale could owe capital gains tax on any profit above $250,000 for singles and $500,000 for joint filers.”
Determining the impact and timing of capital gains taxes can be complex, which is one more reason why we urge you to meet with a qualified fee-for-service financial planner before you start the downsizing process.
Samantha Kennedy, a certified financial planner in Bellevue, Washington, advises some of her clients who owned highly appreciated homes to hold off on a sale until the year of their retirement, when their income would likely have dropped. She told Garland of the New York Times, “If your income is lower, you will have potentially lower capital gains tax.”
Kennedy also recommended that “homeowners who had experienced large home appreciation should gather their records of major improvements over the years, such as remodeling or a new roof. Sellers can reduce the taxable gain by adding those costs to the original purchase price of the house.”
Balancing Long-Term Cash Flow and Retirement Lifestyle Priorities
Part of the appeal of downsizing is the assumption that utility costs, insurance, and property taxes on the new home will be less than the previous one, which can help bolster retirement income, Garland notes.
As we noted in this recent Blog article, renting rather than buying is a real option, in fact, for those who don’t want to deal with home maintenance. “And because closing costs can be steep, renting also may be a good option for downsizers who expect to move again within several years,” according to Kennedy.
Determining the People and Things that Matter to You
Andrew Carle, instructor at Georgetown University, encourages retirees looking to downsize to consider carefully the kind of life they want to lead after retirement.
Along with health needs for the next five to ten years, Carle recommended: “Plan it the way you plan a lot of things in life. Do you want to be near the grandkids? Do you like the neighborhood you’re in? What are your interests and hobbies?”
For the Kisses and the Boyds, their considerations led them through the financial headaches. Dale Boyd said, “We moved for location and lifestyle, rather than finances. We wanted proximity to our kids and our friends and the neighborhood we lived in for many years.”
For the Kisses, it was about attending to future health issues, but also social interaction with other residents. “At the beginning, I had to get used to the fact that the place was so much smaller,” Louise Kiss said. “But I would walk to the lobby or the library or the rec room and hear a lecture in the auditorium, and I was fine.”
Designing Your Ideal Retirement Future with Rajiv Nagaich
Rajiv Nagaich’s newest program on PBS, called Designing Your Ideal Future, is bringing Rajiv’s powerful message to Americans from coast to coast. This engaging and challenging PBS show is prompting thousands to take a fresh look at the type of planning that will help them succeed in retirement.
In this one-hour PBS special, Rajiv Nagaich takes viewers step-by-step through the principles of creating a retirement plan that truly supports the life you want to live. Instead of generic check-the-box paperwork, Rajiv reveals how to infuse your perspective — your values, goals, and priorities — into every legal document and life plan component so your plan becomes a living system for your future.
Designing Your Ideal Future includes insights from real-world planning examples and a live Q&A with Rajiv Nagaich that answers viewer questions about retirement planning, legal readiness, and family communication. It’s perfect for anyone approaching retirement, currently retired, or responsible for a loved one’s future care — and for those who want a clear, effective approach to planning that prioritizes personal choice and quality of life.
What About You?
You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then these materials are your key to retirement success.
Visit your local PBS station’s schedule to find airtimes and learn how to access companion resources — including a free Legal Readiness Quiz and tools to help build your complete LifePlanning system.
Don’t remain among the millions of Americans sleepwalking their way into a retirement they never wanted. Instead, your retirement can be the exciting and fulfilling life you’ve always hoped it would be. Start by watching, reading and sharing Rajiv’s important message.
And remember, Age On, everyone!nt of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then these materials are your key to retirement success.
Visit your local PBS station’s schedule to find airtimes and learn how to access companion resources — including a free Legal Readiness Quiz and tools to help build your complete LifePlanning system.
Don’t remain among the millions of Americans sleepwalking their way into a retirement they never wanted. Instead, your retirement can be the exciting and fulfilling life you’ve always hoped it would be. Start by watching, reading and sharing Rajiv’s important message.
And remember, Age On, everyone!
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