Downsizing For Retirement Guide

Downsizing For Retirement Guide

Many seniors opt for downsizing for retirement but it’s a huge decision and not one to be taken lightly.

It is made on the basis of financial, physical, and emotional influences and it’s a complex and sometimes uncomfortable process.

Let’s take a look at why downsizing for retirement is so popular and how you can go through this process in as straightforward a manner as possible.

Retirement Planning Is Not Just About Retirement Savings

Retirement Planning Is Not Just About Retirement Savings

It’s important to note that downsizing is not always about money – it may involve all sorts of other reasons, such as the layout of your current home no longer being practical because of age-related health issues, or the location of your home being too far from family, or simply a desire to deal with less stuff in your later years.

You should save money from downsizing in most cases and even see a boost to monthly cash flow but this doesn’t have to be the driving force behind downsizing.

Think About Why You Want To Move

Moving is a stressful process. So, it’s always a good idea to think about why (and if) you want to move.

The number one reason according to a recent study by Merrill Lynch for people to move is for them to be closer to their families.

In number two, was the desire to reduce personal expenditure.

And sometimes, you don’t choose a move – it’s forced on you by circumstances. The loss of your spouse, financial problems, health issues, etc.

Whichever it is it can help to know:

  • Where you would like to move to – will it be a similar area to where you are or in a different state (or even country)?
  • What kind of home do you want and is it practical for your needs?
  • How much space are you going to want to enjoy life?
  • What are you willing to give up in the moving process?
  • How much time and money are you willing to put into this?

You should also discuss this with your family members including adult children and your spouse.

The Financial Impact Of Going Small

Your retirement lifestyle ought to improve following a home sale.

The Financial Impact Of Going Small

Most retirement downsizing results in:

  • More cash flow – even after all the costs associated with a move, most people see a decent windfall to their retirement nest egg from the equity they release
  • Mortgage payment goes down – a smaller home is usually a cheaper home, monthly fees are likely to fall
  • Less work – apart from some home renovations in a new places, you ought to cut costs when it comes to cleaning and maintenance costs too
  • Utility costs drop – you should also be spending less on heating, air-con, etc.

But that doesn’t mean you will have more money without costs – there are real costs to this process too.

The Costs Are More Than Just A Real Estate Agent

You need to think about:

Home Owners Association Fees – if your family home ends up in an HOA area then you will be paying HOA fees every month (and these can be as much as $700 a month!)

Preparing Your Home – even in a seller’s market, you get better money for a home in tip-top condition but getting it there will cost money

Closing Costs – it costs money to sell your home and wrap it up

Real Estate Agents Fee – you will also have to pay a real estate agent about 6% of the sale price on your home

Capital gains tax – the internal revenue service loves it when people sell homes because more tax becomes due

Move-in costs – unless you’re moving into a ready-made retirement community you’re probably going to have to buy things to furnish and use in your new home.

Downsizing Your Possessions

Downsizing Your Possessions

Before you can move out – you will need to start downsizing your possessions.

This can be a more stressful experience than the move itself in some ways, so it’s best to prepare for this process.

Pace Yourself, Plan, And Start Small

You don’t need to do everything at once and we certainly don’t recommend that you start by trying to go through old family photos and deciding which ones you want to keep.

The best way to do this is to give yourself 6-12 months to carry it out and to put a plan in place for tackling each room.

Get Ruthless (And Real)

Now, for the hard part – downsizing your things is hard work. You can fall in love with things so easily and then want to hold on to them.

Get Ruthless (And Real)

But you’re going to want to get rid of 70-80% of the things you have accumulated in your single-family home over the last 20-40 years.

Start by getting rid of everything that you haven’t used in a year – unless it has incredible sentimental value.

Then go through and weed out duplicates, paperwork that is no longer needed, clothes that aren’t going to be worn again, books and magazines (donate them to the local library or put them in a thrift store).

Create Memories

It really can help with downsizing like this if you go around your home and take photographs of everything before you start.

This helps you remember the old, familiar home and the memories in it and frees you up emotionally to start getting rid of things.

You can also use the photographs to help measure up things you’re keeping and moving to your new home.

Sell And Donate

You should also consider selling things that you don’t need rather than throwing them out.

Sell And Donate

Use websites like Facebook Marketplace and Craigslist to sell items of value and make sure to only take cash payments (these sites have the occasional scammer and check bouncers operating on them).

Maybe hold a yard sale to get rid of smaller items with lesser value.

And if you find things you’ve borrowed over the years as you go through your stuff? Give it back now.

Then, whatever’s left that isn’t junk ought to be donated to The Salvation Army or a similar organization. If you want a tax break for donating, consider using Give Back Box which gives you a receipt for a deduction.

Consider Using An Expert Service

If all this feels like too much work – consider using a “move manager” from the National Association of Senior Move Managers to do the job for you.

Be warned though, they’re a big expense for some folks on a fixed income and it’s sometimes just easier to do it yourself.

These people deal with the strategy and planning of moves, they won’t clean your home for you.

Deal With The Emotional Fallout

Deal With The Emotional Fallout

For some people, the move can be hugely emotionally draining.

If that’s you, that’s OK – the key to dealing with this is to find support. When you’re feeling blue or distressed call a friend or someone from your family and ask them to help as you go through things.

And if that doesn’t help? Consider professional help, it really can make you feel better.

Hit The Real Estate Market And Sell Your Current Home

Once all the excess stuff is going it’s time to sell your home and there are a few things to think about here.

Tax And Benefit Implications

You won’t need to pay tax on capital gains if your home is sold for up to $250,000 if you’re single and married couples filing jointly can avoid them on homes sold up to $500,000.

Tax And Benefit Implications

Capital gains are the difference between the purchase price and what you sell it for.

If you’re on a low income, your federal tax return also allows for a reduction in capital gains taxes. So, talk to an accountant about keeping taxes to a minimum.

You should also look at Medicaid and SSI payments as selling your home may interfere with your ability to claim these benefits.

Get The Moving Costs Together

Moving costs include the moving truck, the moving company, full-service movers if you need them, and potentially a moving container too.

You may also need to place any excess stuff that can’t be moved to your new place into storage at a small monthly cost.

Find A New Home

Find A New Home

You don’t have to purchase a new home, you might opt to move into an assisted living community or any other best senior housing options.

You might even retire in Thailand or retire in the Philippines and just rent a place for the foreseeable future.

But if you are going to buy, rent, etc. now is the time to do it. Once you’re sure you can afford the move and everything else is dealt with.

Options For Downsizing Without Moving Home

Finally, we should point out that you don’t have to find potential buyers for your home – you can always downsize without moving.

Some options for this include:

  • Renting out a room in your home to help increase your income. We strongly advise you take legal advice regarding your rights and drafting a tenancy contract if you do this.
  • Take a reverse mortgage. This can help free up equity in your home while you still live there. But talk to an Independent Financial Advisor about this – it has some risks too.
  • Just declutter. Removing all the junk from your existing home can make it feel like a new location and reduce the risks of accidents in later life.

Final Thoughts On Downsizing In Retirement

It can make a lot of sense to downsize your life and your home in retirement.

But only you can decide if it’s the right thing for your circumstances.

If you do decide to spend your retirement years in simpler circumstances we think the guide above is the best way to prepare for it. Good luck and have fun!

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