Downsizing in Retirement: Expenses They Didn’t Expect (2022)

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On the way to spending less, people often have to shell out more, at least temporarily — especially when selling a home. Here’s what to consider.

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Downsizing in Retirement: Expenses They Didn’t Expect (1)

By Susan B. Garland

Louise Angel Kiss and her husband, Charles, lived in their four-bedroom, split-level house in the Seattle suburb of Bellevue, Wash., for 40 years. Their two daughters had moved away long ago, and the couple decided they’d had enough of the stairs and the hassles and costs of upkeep. Like many older homeowners, they decided to downsize.

In 2018, the couple chose a two-bedroom unit at a continuing care retirement community in nearby Issaquah, which would provide assisted living and nursing care if they needed it.

“We had our bubble of security and safety,” said Mrs. Kiss, 81, a travel agent. Mr. Kiss, 86, sold a dry cleaning business years ago.

During the process, however, the couple discovered what many prospective downsizers do: more expenses and headaches than they’d anticipated.

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.

(Video) Downsizing in Retirement: The Do's and Don'ts

“We were not happy we had to go through all that,” Mrs. Kiss said. “If I were advising someone who is downsizing — make sure you have all your ducks in a row and are prepared for any contingencies.”

Like the Kisses, Dale and Marian Boyd were in for a surprise when they put their four-bedroom ranch house in Newnan, Ga., up for sale a year ago. The couple were asking top dollar and figured they would have time to look for a new place before their house sold. It sold in one day.

Two weeks later, they 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.

“We got caught with our pants down,” said Mr. Boyd, 75, who owns a plumbing contracting business. “We had not decided where we wanted to live yet.”

Get real on housing costs

One way to avoid such surprises is to thoroughly check out the housing market before putting out the “For Sale” sign. 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.

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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. Rising mortgage rates and a declining stock market are making it more difficult for younger home seekers with families to afford the down payment and monthly payments for a large, pricey home, said Kari Haas, a real estate broker in Bellevue who helped the Kisses sell their house.

Ms. Haas said many older homeowners had delayed downsizing during the worst of the pandemic, and homes were now lingering on the market. Also, she said, sale prices have dropped since earlier this year, when mortgage rates began to rise. At the same time, she said, older buyers are competing with younger buyers for less expensive, smaller homes. “There are not a lot of smaller ramblers and single-level townhouses to go to,” Ms. Haas said.

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 typically include a 6 percent real estate agent commission, though sellers could try to negotiate a reduction to that charge. Moving costs and home staging, such as new paint, floors or remodeling, will also eat into profits.

Mike Robinson, a real estate agent in Peachtree City, Ga., outside Atlanta, said home buyers who planned to move into condominiums or independent homes in planned 55-plus retirement communities also needed to budget for monthly fees. 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.

Buyers should be sure to ask what the fees cover. In some communities, for instance, they do not cover lawn care or parking.

Mr. Robinson, who is Mr. Boyd’s brother-in-law and helped with the sale of his house, also said retirees should take a close look at a potential destination’s taxes. States vary on how they tax retirement income, and property taxes differ by locality. 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.

(Video) Downsize Your Life: Why Less is More | Rita Wilkins | TEDxWilmingtonWomen

“If you’re turning 65 in our area, you could save a considerable amount on property taxes,” said Mr. Robinson, referring to his county’s income-based partial tax exemption for seniors.

If your house has appreciated significantly over the years, 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. Widows and widowers may be eligible for the $500,000 exclusion if they sell within two years of a spouse’s death and have not remarried at the time of the sale.

The long-term capital gains tax is generally zero percent, 15 percent or 20 percent, depending on one’s income during the year of the sale.

Samantha Kennedy, a certified financial planner in Bellevue, said she had advised some clients who owned highly appreciated homes to hold off on a sale until the year of their retirement, when their income likely dropped. “If your income is lower, you will have potentially lower capital gains tax,” she said.

Ms. Kennedy said 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.

Mrs. Kiss said she and her husband had paid capital gains tax on the sale of their home. On top of that, the money they earned from the sale beyond $500,000 drove up their income-related monthly Medicare premiums for the year. And because their premiums are deducted from their Social Security payments, they received smaller monthly benefits. “That really hurt,” she said.

Improving cash flow

Many downsizers expect to improve their retirement income stream if their new home costs less than what their old house sells for. Lower utility costs, insurance and property taxes — as well as investment returns on the proceeds — can also improve the bottom line. Though a certified financial planner can help run the numbers, you can get some idea of the benefits by plugging your data into the move-or-stay-put calculator of the Center for Retirement Research at Boston College.

You can use the same calculator if you are thinking of renting rather than buying after selling your house.

“If you don’t want any home maintenance, renting may make sense,” Ms. Kennedy said. And because closing costs can be steep, renting also may be a good option for downsizers who expect to move again within several years, she said.

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Despite their unexpected costs, Louise and Charles Kiss improved their cash flow after they sold their house. With the proceeds of the house sale, the couple were able to repay the bridge loan for the upfront entrance fee at a retirement community called Timber Ridge at Talus and invest the balance, about $250,000, in U.S. Treasury bonds. They cover the monthly fee and other expenses with interest on those bonds, retirement savings, Social Security benefits, Mrs. Kiss’s income as a travel agent and a pension she receives as a retired nurse for the state medical system.

The couple have few additional expenses beyond groceries, the occasional cruise and dinners out with friends. The community’s monthly fee covers utilities, maintenance, weekly apartment cleaning and many meals and amenities. They have gone from two cars to one, saving on insurance, gas and repairs. If the spouses need transportation at the same time, the retirement community provides a free ride service.

Beyond finances

For the Kisses and the Boyds, the lifestyle their new homes would provide was as important as any financial consideration.

(Video) Downsizing is WAY Overrated… Why Rightsizing is a Better Way to Go (In or Before Retirement)

Retirees who are looking to shrink their square footage should carefully consider the kind of life they want to lead, said Andrew Carle, the lead instructor of a graduate curriculum in senior housing administration at Georgetown University.

“Plan it the way you plan a lot of things in life,” Mr. Carle said. “Do you want to be near the grandkids? Do you like the neighborhood you’re in? What are your interests and hobbies?” He said retirees should also consider their health needs for the next five or 10 years before deciding on a new place.

The Boyds were living in a golfing community and eventually moved to a smaller house on a smaller lot in a 55-plus community in the same city.

“It was not a financial burden,” Mr. Boyd said. “We had aged past the lifestyle we had in that house.” They were paying extra for the community’s country club that they rarely used, and he no longer wanted to maintain the lawn on his half-acre property.

The Boyds sold their house for about $500,000 and bought the new one for $450,000 with cash from the sale’s proceeds. A $300 monthly fee covers lawn care and access to a clubhouse with a fitness room, tennis courts and a pool.

“We moved for location and lifestyle, rather than finances,” he said. “We wanted proximity to our kids and our friends and the neighborhood we lived in for many years.” Their son, daughter and five grandchildren live nearby.

As for the Kisses, finding a place that could attend to future health issues was paramount. So was social interaction with other residents, including Mrs. Kiss’s sister, who lives in the complex. Mrs. Kiss, who is now the social chairwoman for her floor, recently organized a summer social on the patio with hamburgers, ice cream and “the whole works.”

“At the beginning, I had to get used to the fact that the place was so much smaller,” she 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.”

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FAQs

What are some examples of expenses that Don't go away when you retire? ›

5 Surprise Retirement Expenses
  • Hidden housing costs. Nearly 80% of those ages 65 and older own their homes, according to the Joint Center for Housing Studies of Harvard University. ...
  • Uncovered health care. ...
  • Long-term care. ...
  • A child in crisis. ...
  • Losing a spouse.

Is it a good idea to downsize on retirement? ›

Downsizing for retirement is a great way to save money on mortgage payments, property taxes, insurance, utility costs, and more. You'll also be able to cut back on maintenance and upkeep services like lawn care and snow removal when you downsize from a large home to a smaller home.

Is there a downside to downsizing? ›

Downsizing can increase your cash flow, lower your utility bills, and reduce the time you spend on maintenance and upkeep. The downsides to downsizing include having less room for guests and having to get rid of belongings to fit into a smaller space.

Do you have to pay capital gains tax when downsizing? ›

Yes. The capital gains tax bill does come into play when you're selling a buy-to-let property or a second home. This is why if you're downsizing you effectively have an 18-month period to sell your original home before the property starts to become liable for capital gains tax.

Which is the biggest expense for most retirees? ›

Housing. Housing—which includes mortgage, rent, property tax, insurance, maintenance and repair costs—is the largest expense for retirees. More specifically, the average retiree household pays an average of $17,472 per year ($1,456 per month) on housing expenses, representing almost 35% of annual expenditures.

What expenses can be cut in retirement? ›

Mortgage
  • Lower your expenses. Many retirees are tempted to spend more money on leisure activities in retirement. ...
  • Mortgage. Paying off your mortgage eliminates one of your biggest monthly bills. ...
  • Commuting costs. ...
  • A second car. ...
  • Professional clothing. ...
  • Time-saving costs. ...
  • Office costs. ...
  • Paying full price.

At what age do most seniors downsize? ›

As adults age into their 50s and 60s, many of them are ready to downsize. That often means purchasing a townhouse to trim maintenance or a smaller one-story home to keep stair climbing to a minimum.

Why is downsizing so hard? ›

Downsizing and moving is often accompanied by the anxiety of the unknown. Anxiety when downsizing often comes from the prospect of discarding possessions and deciding which possessions to take with you. When you've spent a great deal of time in one home, a lot of stuff accumulates.

How do you know when it's time to downsize? ›

  • When do most people downsize their home? ...
  • Your monthly housing expenses have risen above 30% ...
  • Your monthly budget leaves little leftover cash. ...
  • You're feeling overwhelmed with home maintenance. ...
  • Your home no longer fits your needs. ...
  • You're the oldest resident in your neighborhood.
31 May 2022

What alternatives are there to downsizing? ›

  • Hiring linked to vision. The institution identifies what skills it will need in order to meet its vision and goals. ...
  • Cross training. ...
  • Succession planning. ...
  • Redeployment within the organization. ...
  • Creating value-added and revenue-enhancing opportunities. ...
  • A comprehensive model. ...
  • Reduced hours. ...
  • Lower wages.

What to do with your stuff when you downsize? ›

For smaller items, you're probably better off taking them to a consignment shop if they aren't collectible or antique. That way they're off your hands in one big group, and you don't have to sell them piecemeal online. For valuable antiques, it's a good idea to take them to an antique dealer.

How much should you downsize? ›

Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a “rule” that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).

What is the best age to downsize your home? ›

Through research done by Retirement Move, we've learnt that the perfect age to downsize is 64. Downsizing at this age allows you to get the best out of your house, and means that you don't struggle with the stress and physical labour of moving house.

How long do you have to keep a property to avoid capital gains tax? ›

Where this is the case, the period of occupation as a main home is sheltered from capital gains tax, as is the final 18 months of ownership, regardless of whether the property is occupied as a main home for that final period.

Is it a good idea to downsize your home? ›

Done right, downsizing can still be a good idea. You might not just walk away with more money but also simplify your life and reduce your home-maintenance and utility costs for years to come. To reach that happy outcome, you need to steer around the unexpected pitfalls that make downsizing so dicey.

What is the golden rule for retirement? ›

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.

What is the 4 rule in retirement? ›

The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio's value. If you have $1 million saved for retirement, for example, you could spend $40,000 in the first year of retirement following the 4% rule.

Is $4000 a month a good retirement? ›

Retiring on $4,000 a month will give the average American plenty of options for a fulfilling retirement—and leave some room to splurge on the grandkids and travel. So how do you pick a spot?

How much does the average retired couple live on per month? ›

The typical senior couple consisting of a retired worker and a spouse, both of whom claim Social Security benefits, received about $2,739 per month as of April 2022. That amounts to an annual benefit of about $32,868 per year. Though that's a sizable sum, it still falls short of the average senior couple's expenses.

How much money does average retiree have? ›

As we stated earlier, research by the Federal Reserve found that the median retirement account balance in the U.S. – looking only at those who have retirement accounts – was just $65,000 in 2019 (the survey is conducted every three years). The conditional mean balance was $255,200.

Which one of the following expenses for retirees is most likely to decrease? ›

personal finance
In case of a divorce, division of pension benefits generally depends on the length of the marriage.
following expenditures for retirees is likely to increasehealth insurance; medical expenses
expenditures for retirees is likely to decreaseclothing expenses; federal income taxes
45 more rows

What is a good size retirement home? ›

And if you ask us, the perfect size for a retirement home is 1,500 square feet.

Is 75 too old to buy a house? ›

A: Let's start with the premise you are never too old to buy your first home. We do not care if you are 60, 70, 80 or even 90 years old.

How do you emotionally let go of your house? ›

Tips for Emotional Sellers
  1. Start the process early. The earlier you start preparing your house to be sold, the easier it will be when the day comes to move out.
  2. Focus your emotions on your next home. ...
  3. Spend time fixing the little things. ...
  4. Get out of the house. ...
  5. Put yourself in the buyer's shoes.
19 Oct 2016

How do you downsize when you are overwhelmed? ›

5 Tips for Downsizing and Moving without Feeling Overwhelmed
  1. Be Honest and Clear.
  2. Have a Plan.
  3. Ask for Help.
  4. Rest and Don't Overdo It.
  5. Take Time to Have Fun.

How can I downsize without stress? ›

6 Methods to Downsize with Less Stress
  1. #1 Focus on the positive. Maybe you've lived in a home with a large yard you've had to care for. ...
  2. #2 Start small. ...
  3. #3 Make it a family affair. ...
  4. #4 Donate and make a difference. ...
  5. #5 Sell your no-longer-needed valuables. ...
  6. #6 Let someone else do the work.
13 Jun 2018

What is a good size house for retirement? ›

Since Southern Living has so many unique house plans in our collection, we've come to learn which are the best and most-loved layouts for each stage of life. And if you ask us, the perfect size for a retirement home is 1,500 square feet.

Is it smart to downsize your home? ›

Done right, downsizing can still be a good idea. You might not just walk away with more money but also simplify your life and reduce your home-maintenance and utility costs for years to come. To reach that happy outcome, you need to steer around the unexpected pitfalls that make downsizing so dicey.

What are the advantages of downsizing? ›

Although downsizing can seem like a daunting idea for many businesses, here are a few advantages this move can provide corporations:
  • Eliminating costs. ...
  • Improve efficiency. ...
  • Changing location. ...
  • Opening opportunities. ...
  • Adapting to changes. ...
  • Hands-on approaches.

Is it worth downsizing to be mortgage free? ›

Being able to live mortgage-free gives you more freedom when you're retired, and will also allow you to decide in the future what happens to the house, as you'll own it in full. This means you can leave the house to someone as an inheritance, rather than it needing to be sold.

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