Are you looking forward to downsizing your residence? Empty nesters and retirees often do so with the hope of simplifying their lives; reducing costs; and potentially putting more money into their retirement portfolio. However, before you put the For Sale sign in your yard, consider the pros and cons.
Many people assume downsizing their lifestyle during retirement is a simple task that leads to decreased spending and increased satisfaction during non-working years. Scaling back may sound easy enough, but hidden costs could upset your plan. Here are a few pros and cons to consider:
Upside to Downsizing
Downsizing your lifestyle can definitely lead to a simpler and less stressful retirement. Decreasing overall spending can increase one’s sense of financial security during retirement years. Here are some of the potential benefits to making the decision to downsize:- Lower monthly mortgage or rent payments
- Reduced maintenance and upkeep
- Decreased utility costs
- Increased retirement savings with additional of equity in your current home
Along with the quantifiable upside to downsizing, you may feel less stress once you have organized and gotten rid of possessions accumulated over the years prior to moving to a new home.
Downside to Downsizing
A common misconception is that downsizing from the larger house needed for your family to the smaller empty-nester residence means you will have dollars left over after the completion of both transactions. However, many times homeowners are surprised to find the purchase price for a smaller, but newer house with desirable amenities, will cost more than the sale proceeds received from the sale of their larger home. While this may not always be the case, if it is, you may need to consider whether relocating really enhances your financial situation enough to overcome the higher investment in your home.If you do move forward, here are a few other costs to be aware of:
- Realtor fees generally around 5-6% of the home’s sale price
- Improvements and renovations needed to sell your existing home, such as new windows, new roof, updated appliances, etc.
- Enhancements to your new home
- Moving costs
- Purchase of new furniture, decorations, landscaping, etc.
Be Aware of Tax Implications
Tax implications are important factors when deciding to downsize. How does the property tax for the new home compare to your current residence? If your downsizing requires a move to a different state, will you pay more or less income tax or sales tax?
Another tax that may apply if you are selling a home that has appreciated in value is a long-term capital gains tax. Residential appreciation exceeding $250,000 for individuals or $500,000 for married couples will result in a capital gains tax on your federal income tax return for the year of the sale. If this is your situation, consult a tax professional.