6 Mistakes and Pitfalls To Avoid When Downsizing for Retirement
Written by
Caitlyn Moorhead
Edited by
Joe Evans
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
When it comes to retirement planning, downsizing in your golden years reduces your expenses, frees up some extra cash and cuts down on the time and commitment needed to maintain your current home or lifestyle. If you do it right, you can even put that spare money and energy into other things — like upping your investments, building generational wealth and living the life of your dreams.
Simply put, buy a house fit for a family when you have one and build equity over the years. When the nest empties and retirement nears, sell it to buy something smaller, cheaper and more manageable, and use the difference to finance your glorious golden years.
However, several things can go wrong when downsizing your home, your belongings or your options. A lack of proper planning and preparation can be expensive and takes a toll on both your emotional state and Social Security benefits. That’s why you should approach the downsizing process like anything else in retirement — with careful planning and consideration.
Though it can shrink your credit card bills and stretch your retirement savings, it can also diminish both your nest egg and your peace of mind. So, before you start downsizing or get too far along, here are some of the biggest mistakes people make and how to avoid them, according to experts.
Underestimating the True Cost of Downsizing
Not only can leaving a home where you built your life and raised a family be an emotionally taxing experience, but your smaller house and lifestyle could come with some culture shock. One of the biggest reasons to downsize is to cut expenses and free up spare cash. However, downsizing can be more expensive than anticipated, especially when people sell their current home for another one without calculating moving costs.
“While downsizing can ultimately help you save money in retirement, the moving process itself can be pricey,” said Terry Turner, financial wellness facilitator, senior writer at Annuity.org and writer for RetireGuide. “Homeowners association fees, getting your house market-ready, homeowners insurance, property taxes, real estate agent fees and purchasing new furniture for your space are just a few expenses that can add up during your move.”
Downsizing also takes a long time to get right — something people aren’t always prepared for. To avoid this mistake, Turner recommended setting clear expectations early to stay on track financially.
Neglecting Your Emotional Well-Being
Retirement is a life-changing decision, and so is downsizing. However, sometimes people get so caught up in the financial side of things that they make hasty decisions or neglect their own emotional well-being.
“Another blunder is letting emotions drive the decision, leading to hasty choices like moving too far from family or ditching items they later regret,” said Jeff Rose, CFP and founder of Good Financial Cents. “Emotion-driven decisions result in regret or the realization that the new place doesn’t truly meet their needs.”
One way to avoid this mistake is to take things slow. If, for example, you’re planning to sell most of your things and move to a smaller home, don’t do it all at once. Take it one step — or one room — at a time, and spread it out. That way, if you start feeling overwhelmed, you can put the process on pause and recalibrate.
A New York Couple Finds Themselves Homesick in Florida
Dennis Shirshikov is a professor of finance, economics and accounting at the City University of New York and the head of growth at Awning. He’s seen several clients suffer through regrettable downsizing misadventures.
“One particular story that stands out is about a retired couple named John and Mary,” said Shirshikov. “They had a four-bedroom house in a busy suburb of New York, where they had lived for more than three decades. When they retired, they decided to downsize, selling their house and buying a small one-bedroom apartment in Florida closer to the beach. The idea was to live a quiet, peaceful life without the hassle of maintaining a large house.”
But what seemed like a perfect plan soon started to unravel.
“John and Mary realized that they had underestimated their attachment to their former home,” said Shirshikov. “The apartment was significantly smaller, and they missed the space that they had grown used to over the years. The quiet neighborhood lacked the vibrancy they were accustomed to, and they often felt isolated. Additionally, their grandchildren visited less often due to the lack of space, and they deeply regretted not being able to host family gatherings like they used to.”
Waiting Until the Last Minute
Another common downsizing mistake is waiting too long to get started. Although the process is rather quick for some, it’s generally best to err on the side of caution and start early so that you don’t miss anything important or make decisions you’ll regret.
“It’s crucial to start planning early and to consider the full picture. Seek advice from a financial advisor who can help lay out all potential costs,” Rose said. “It might also be helpful to chat with friends or family who’ve gone through the process or even consider hiring a downsizing expert.”
Your retirement years could stretch for decades, so it’s better not to rush the downsizing process. Try to plan ahead and think about what you’ll need in the future rather than just what you need right now.
Ignoring Tax Implications
Part of the downsizing process may involve selling your home or other assets. While that’s not a mistake, ignoring the possible tax implications is. This is because, depending on how much you profit from the sale of your assets, you could end up owing more on taxable income.
Profits of up to $250,000 for individuals and $500,000 for joint filers are exempt from capital gains taxes. Those are fairly easy thresholds to meet in a normal housing market, but today’s downsizers are selling near the market’s peak, and if they breach those limits, they could owe as much as 20% on the profit.
Jen Reid, a financial planner and founder of Base, a financial planning, CFO and money management firm, emphasized the importance of understanding capital gains and preparing for any tax implications before selling your assets.
“Especially in this high gains market, if you are taking away a profit over $500,000 as a married couple and $250,000 as an individual, you need to make sure that you are strategically thinking about other income and assets that will be affected by this sale,” Reid said.
Purchasing a Home Not Suited to Your Needs
Should you decide to sell your home and deal with all the closing costs, you’ll still need somewhere to live. Whether you purchase a new house or rent a place, don’t ignore your long-term needs.
“It’s important to consider what style of home will be practical to navigate as you age, as well as how much space is realistic for you to be comfortable,” Turner said. “Choosing a home that doesn’t fit your long-term retirement needs could lead to discomfort in your new space.”
Think ahead in terms of mobility and accessibility so that you don’t end up regretting your decision. If you plan to modify your home later, be sure to account for the future costs. When you approach retirement, having comfortable surroundings is important both inside and outside your home.
A Couple’s New Neighbors Are Too Close for Comfort
Tracey Beni, the founder and recipe creator of The Naked Diabetic, downsized with her husband in 2016 as they approached retirement age.
“The property we were downsizing from had a large estate home on a one-acre lot with gardens, an inground pool and all the amenities,” she said. “We decided on a custom-built home, and it was a great experience being able to choose everything that suited our lifestyle.”
But the new home came with a comparatively tiny lot just a few feet away from their new neighbors.
“We had never lived so close to others before, and when the builder told us he was very selective about who he sold to, we had unmet expectations,” said Beni. “Although the neighbors are nice, no one needs to hear everything that goes on inside your four walls. We can hear everything on both sides of us — screaming at their children, singing in the shower, marital arguments and hot-tub shenanigans.”
They’re planning to move again shortly to a smaller house on a larger lot, paying all those fees on both sides of the transaction a second time.
“My advice to anyone downsizing is to make a checklist of things you love about your current home and the things you can give up and stick to it,” said Beni. “Be patient until the right property comes along and work with a realtor who can stick to your list of must-haves.”
Thinking You’re Downsizing When You’re Not
Although many people downsize because they think it will help extend their retirement accounts once they start collecting Social Security, retirees often increase their spending rather than cutting back on costs. This heavily impacts those who need the extra cash to help them live comfortably throughout their retirement years.
Not to mention, it costs an average of about $1,400 for moves close by and between $2,200 and $5,700 for long distance. Downsizing also means less space, which often leads to long-term storage, tacking on another estimated $180 per month.
Reid suggested that some retirees might think they’re downsizing when they’re not.
“They may think initially that selling a home will help them decrease costs, but then there are other variable expenses that increase [costs],” Reid said.
For example, they might travel more or increase their spending in other ways because they think they have more flexibility.
Whether your decision to downsize is emotionally or financially driven — or a combination of both — take the time to make a solid plan and calculate your decision’s costs. Create a realistic budget and leave some wiggle room in case of emergencies or unplanned expenses. You can even consult a retirement specialist or financial advisor about your options.
Angela Mae contributed to the reporting for this article.
More From GOBankingRates
