When you’re looking ahead to retirement, it can feel overwhelming to consider all the decisions you’ll need to make about your lifestyle in the next chapter: how you want to spend your time and your resources, whether you want to travel, and—often most importantly—where you want to live.
Many people nearing retirement already own their homes, and may have lived there for decades—the idea of relocating or downsizing might seem unthinkable. However, there are legitimate benefits to selling your family home in favor of buying something smaller, or even transitioning to renting.
Finance tips delivered straight to your inbox.
The Benefits of Downsizing
Downsizing has many potential benefits for retirees, whether you opt to buy again or rent. It can lead to a more manageable and comfortable living space as you move through retirement, and even free up valuable time and money by reducing the physical and financial burden of maintaining a larger home.
If you’re considering downsizing, think about the following:
- Financial Flexibility: Depending on prevailing interest rates and market conditions, downsizing can potentially free up cash that was tied up in a larger property. This extra money could be invested, used to pay off debts, or contribute to a more fulfilling retirement lifestyle.
- Simplified Lifestyle: A smaller home often means less time and effort spent on cleaning and maintenance. This can lead to a more relaxed and enjoyable retirement, allowing you to focus on activities you truly value.
- Medical & Mobility Considerations: A new home may be better equipped for the capabilities of people in their later years. Single-level homes with wider hallways, open floor plans, and more modern amenities can be advantageous for the “golden years.”
- Community and Social Opportunities: Downsizing might involve moving to a community that better suits your retirement lifestyle. This could lead to increased social opportunities, new friendships, and a supportive network.
- Environmental Impact: A smaller home typically has a smaller environmental footprint. Downsizing can be framed as a way to live more sustainably, which may resonate with environmentally-conscious retirees.
With these financial and lifestyle considerations in mind, downsizing may be right for many people. However, there are also a few drawbacks to consider before putting your home on the market.
The Drawbacks of Downsizing
Close to 42% of people plan to downsize at some point during retirement. However, it’s important to consider all the facts before making a decision, as there are some key points that might change your position.
Here are some potential disadvantages to downsizing that you may want to consider:
- Space Limitations: Downsizing often means less space. This might be challenging for individuals who are used to a larger living area, especially if they have accumulated a lot of belongings over the years that they’re not interested in getting rid of.
- Emotional Attachment: People often develop strong emotional ties to their homes. Moving to a smaller space might be psychologically challenging, especially if your current home holds sentimental value or memories.
- Limited Hosting Space: If you enjoy hosting family gatherings or events, a smaller home may not provide the same flexibility as a larger one.
- Cost of Moving: The process of downsizing itself can be costly. There are expenses related to selling, buying, and moving to a new place, including real estate agent fees, closing costs, and moving services.
- Adjustment to a New Community: Moving to a new neighborhood or community can be a significant adjustment. It may take time to establish new social connections and feel comfortable in a different environment.
- Potential Market Fluctuations: The real estate market can be unpredictable. Depending on when you decide to downsize, you might not get the expected return on your current property or could face challenges in finding an affordable smaller home.
Regardless of which way you’re leaning, it’s important to do your research. Knowing the financial implications—tax and otherwise—of selling your current home, as well as thinking through the social and emotional factors, can help you determine if it’s worth considering for your personal situation.
Should I Rent or Buy?
If you’re thinking about downsizing, your next question might be: should I rent or buy? There are a few benefits to each option.
The Potential Benefits of Buying
If you plan to downsize but purchase your next home, you have the benefit of building equity throughout your retirement journey. You may even be able to buy a home outright with the sale of your current house or property and take advantage of potential appreciation in the new property’s value over time.
Additionally, buying a home can come with more stable and predictable costs. Unlike paying rent, mortgage payments may be insulated from increases, and you may even be able to leverage your property as a future income source if you opt to continue investing in real estate.
Finally, owning a home can feel more personal to many retirees. Whether you choose to stay in your family home or downsize and buy a place that better suits your needs and lifestyle, it can feel like a point of personal pride, comfort, and accomplishment to own your own space.
The Potential Benefits of Renting
Renting is often incorrectly viewed as a means to an end—something that young adults and couples do until they can afford their own home. However, there’s been a significant resurgence in renting among retirees for several key reasons. Financial flexibility plays a huge factor in the decision to rent. Renting often involves fewer upfront costs and provides financial flexibility. Retirees won’t have to worry about property taxes, homeowners’ insurance, or significant maintenance expenses. There’s also a certain freedom that comes with renting. It could allow you to easily move around, relocate to another state entirely, or choose your preferred location seasonally.
Renting also has the key financial benefit of freeing up cash flow. Retirees have more liquidity by not tying up funds in a property, which can be advantageous for various financial planning strategies.
Assessing Your Needs and Goals
Ultimately, when you think about whether you want to downsize or stay, rent or buy, you have a few key questions to ask yourself:
- Do I have enough cash flow in retirement to afford my current home?
- Will my current home meet my long-term lifestyle goals? Is it accessible if my health declines?
- Will I spend too much time managing my current home or a home I downsize into?
- What will community look like for me in retirement? It may make sense to move closer to family, friends, or build a new community based on your changing lifestyle.
- Do I want to stay in one place, or do I value flexibility?
The truth is that your unique housing decision is a balance of financial practicality, emotional fulfillment, and long-term planning. There may be no “right” answer, and the best next step for your personal considerations might change throughout your retirement.
The best thing to do is carefully consider what financial needs you might have now and in the future, as well as your emotional connection to your home. Only you can truly know how much value you place in aging in your current environment versus relocating, or whether you’ll feel a lack of stability by renting later in life.
If you think your current home may put a physical or financial strain on your retirement, you may need to make other sacrifices. For example, you may need to hire someone to help maintain your home and property, or add accessibility options to make your home livable rather than taking a big international trip. As with anything in finance, there’s always a weighing of different options. Mostly it’s important to remember that neither decision carries a moral value—it’s neither good nor bad to rent versus buying, it all comes down to what makes the most sense for you.
Additional Considerations
Here are a few other ideas to keep in mind as you navigate your decision:
- Taxes. When you own your home, there are several taxes you’re faced with, including state and local property taxes. You could also be taxed on the sale of your home if you sell for a profit.
- Location. Depending on where you live, selling your home versus renting may be a bit more complex. For example, rent can seem astronomical in many city centers compared to a reasonable mortgage at a competitive interest rate. However, opting to sell and downsize may put you in a similar predicament if housing prices have increased significantly since you purchased your family home.
- Estate planning. Do your heirs have any interest in keeping the home in the family? Or would it be more beneficial to pass on cash or appreciated assets? Speaking with an estate planner can help clarify some of the finer points of your portfolio and come up with a strategy for the best way to pass on your wealth to the next generation.
Asking the Professionals
If you’re debating whether to stay in your current home, downsize to a newly-purchased property, or sell and rent during retirement, our team at Abacus can help. We’ll work with you to look at your home’s role in your retirement plan—financially and otherwise—and make informed decisions for the future. To learn more, book a call with us today. We’re here to support you in this, and every other element of your financial plans.
Sources:
“Upsizing vs. Downsizing in Retirement.” Financial Synergies Wealth Advisors. 24 Aug, 2023.
Emily Brandon. “Why More Retirees Are Becoming Renters.” US News. 26 Feb, 2018.
Disclosure:
This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
