By Lee Sherbakoff, CPA/PFS, CFP®, RICP®
Regardless of whether you purchased your home long ago or have only been there for a few years, downsizing can be an enticing option for many people as they near retirement. There are plenty of reasons to sell and seek out a house that is smaller and a better lifestyle fit. On the flip side, there are also reasons to stay in your current home. Let’s look at some pros and cons so you can make the right decision for your situation.
5 Reasons to Move
Now that you are in or close to retirement, your mortgage might be paid off or, at the very least, you may have a significant amount of equity in your home. Plus, at this point in your life, it may seem daunting to uproot and plant yourself down somewhere else. Here are some advantages to downsizing that might make it worth the time and energy to sell your current home.
1. Save Money
According to a recent survey, baby boomers, Generation X, and millennials all ranked saving money as the top reason to downsize their home. (1) If you still carry a mortgage, selling your residence could clear out your debt and leave you with cash you could put toward retirement, travel, savings, or whatever your goals may be.
A smaller home that’s better adapted to your lifestyle may also decrease expenses such as utilities, further reducing your monthly cash outflow. Reducing your monthly upkeep gives you options, allowing you to either save money or spend on lifestyle choices that are fun and enrich your retirement years.
If you are paying over 30% of your income on housing and maintenance, you might consider a home that puts less pressure on your budget.
2. Smaller Could Be Better
In the same survey mentioned above, the next highest reasons for downsizing were “previous space was too big” and “previous space was too hard to clean/maintain.” (2) If you find yourself looking around your house and feeling overwhelmed with how much work it takes to keep it in top shape, it might be time to downsize.
3. Your House No Longer Meets Your Needs
The large yard for the kids contains special memories, but upkeep has become a hassle. Or it’s becoming increasingly difficult to shovel snow off the long driveway, and cleaning rarely used bedrooms and bathrooms is time-consuming.
What about stairs? You enjoy having the distance and solitude of a second floor, but you now find stairs an increasing challenge. The thought of having everything on one floor is becoming more and more appealing.
4. Demographic Factors
Are you the oldest person in your neighborhood? Young families keep you young; however, many of the neighbors you shared holidays and meals with have moved away. The families that made your neighborhood “your neighborhood” are gone.
Is it time to consider a retirement community with an active association that might reduce the loneliness that sometimes accompanies retirement?
5. You Have Flexibility
As you’ve reached a new stage in life, your career and company no longer dictate where you live. Those that are still working may now have the option to telecommute, while those in retirement may no longer be tied to the city and state in which they live. Are there new locations you might consider?
A new adventure is always exciting and can make you feel like you are an explorer in a new land. But there are always drawbacks to any proposition you consider, so let’s go in with our eyes open and look at some drawbacks to downsizing.
6 Reasons to Stay
While downsizing seems tempting, your unique situation might dictate a better argument for staying put.
1. Overestimating Your Home’s Value
It’s common, especially in this current hot seller’s market, to overestimate how much we could get for our homes if we sell. We look at how much the Smiths got for their house and think that ours might net even more! Even if you think your home is more appealing, what you value may or may not translate into a higher sale price.
Various websites can give you a projection of the value of your home, but these are simply ballpark estimates. A good Realtor can help you realistically estimate the value of your home.
2. Underestimating the Cost of a New Home
Have you taken the time to determine what it is you’re really looking for in a new home? It’s easy to get sidetracked by the latest upgrades available for a kitchen or primary bathroom, or go for the extra bedroom in case you have guests. But all these upgrades add up and you might not save anything by downsizing.
If you are considering a new home, a smaller place can reduce utilities, but remember to factor in the cost of a monthly HOA if the community you are interested in is governed by one.
3. Tax Liability
Most individuals and couples can exclude the first $250,000 or $500,000, respectively, in profits from taxes. (3) Generally speaking, you must have owned the house and have used it as your primary residence for the last two years.
As with any tax matter, complexities may arise. Please feel free to consult with your tax advisors.
4. Moving Costs Add Up
Moving is not cheap. You will face expenses related to selling your home, buying a new home, and moving to a new location.
Depending on where you move, how much you take with you, and how many extra services you want, such as full-service movers, loading/unloading labor, or packing help, your costs could go all the way up to $12,000. (4)
5. Decluttering Woes
Downsizing might seem like a good idea in theory, but are you really ready to part with your pictures, art, furniture, heirlooms, and more? Saying goodbye to long-term possessions can be a difficult and emotional process.
6. Space Headaches
Less space may feel cramped. Do you entertain friends and family often? Have you become accustomed to extra space? Do you sometimes have overnight guests?
You may miss the big family room or dining room in smaller quarters, and you’ll have less space when family or friends join you for an extended visit.
Mull It Over
As you can see, there is no one-size-fits-all answer to whether or not you should downsize. As you look at your financial situation and lifestyle requirements, also ask yourself these questions to help you decide on your next best step:
- If we move, where do we want to buy? What are housing costs in my neighborhood versus an area we are considering?
- Do I want to be near family members? Which ones?
- Should we pay off the mortgage or consider a reverse mortgage?
- What are the available services in the area we are considering? What amenities are important to us, including restaurants, shops, recreation, and entertainment?
- Are the medical services I need readily accessible?
- Do we need the equity in our home to help with retirement?
- Does the emotional attachment to our home we’ve lived in for many years outweigh the advantages of a new home?
- Does the prestige of a larger home project influence and lifestyle that may counter the advantages of downsizing?
- Do I want to consider a retirement community?
Let Us Help With Your Decision
Many people decide to stay in their home, but for others, a change is welcome. Oftentimes, emotional and weighty decisions like this one benefit from the advice and perspective of an objective third party. At The Nalls Sherbakoff Group, our goal is to help apply the advantages and disadvantages of this life-changing choice to your specific circumstances.
Set up a complimentary appointment by calling us at (865) 691-0898 or contacting us online so we can help you walk through the ins and outs of your situation.
Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession. He served as a council member of the Tennessee Society of CPAs and is a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.
DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.