Should You Downsize?

Looking at the advantages and disadvantages of moving into a smaller home

01/22/2019

Should You Downsize?According to a Harris Poll survey performed on behalf of Trulia, 64.2 percent of baby boomers — except those already living in a small home measuring less than 800 square feet — expressed a desire to move into a smaller home if they decided to move within the next year. However, is it financially wise to downsize or better to simply stay in your current house and save money in other ways? Depending on your circumstances, consider these pros and cons to help you determine which option is best for you.

Pros of downsizing

Pete Lang, founder and president of Lang Capital, expresses how a perspective on housing often changes when you transition into a senior life phase. “Typically,” he says, “the general rule [in retirement] is not to treat home ownership as an investment. It's better viewed as a living expense.” Allen Katz, president of Comprehensive Wealth Management Group, LLC, states that downsizing can be a positive route for retirees and can often be a necessity, as their income may not be sufficient to cover the costs of owning a larger home.  

A study from Boston College’s Center for Retirement Research indicates that if you downsize from a $250,000 home to a $150,000 home, you can pocket an extra $6,250 per year. That annual total savings translates to an extra $520 per month — a significant amount that can greatly curb your living expenses in retirement. 

However, as Abby Hayes, contributor for U.S. News & World Report, advises, it’s important to sit down and punch the numbers before making the decision to downsize. Calculate your current homeownership costs and also figure out the total costs for the smaller residence you’re considering. It’s equally important to also factor in the cost of moving and any realtor fees you’ll have to pay when selling your home to purchase a more compact one.

Cons of downsizing

One disadvantage of downsizing is that you’ll have less room for visiting friends and family members. Due to this reason, approximately 49 percent of pre-retirees have chosen against downsizing, and 30 percent of retirees actually opted for purchasing a bigger home, according to a joint survey by Merrill Lynch and Age Wave. 

Another reason you might not want to downsize is if you currently live in an already low-cost region, like the Midwest. Since the cost of living is notably affordable in this region, taxes, insurance and home prices also tend to be more affordable.

Perhaps the biggest caveat to downsizing is that you might lose some of the financial or medical benefits you’re currently eligible for. If your home-sale profit moves you into a higher financial status tier, you might be disqualified from receiving the Veteran Affairs benefits you’ve had access to until now.

You might also have to pay more in taxes if you downsize. As Consumer Reports highlighted, if the profit from your home exceeds an exclusion of $500,000 and you fall under the couple or unmarried widower/widow category, the government requires you to pay federal capital gains tax.

There are a lot of factors to consider before downsizing. It really depends on your unique circumstances and whether or not the total home ownership cost of a smaller house will be less than that of your current house. If you choose to stay put, however, you might consider saving money in alternative ways, such as renting out a portion of your home, as Hayes suggests.

Talk to one of our retirement experts who can help answer questions and offer insight. 

Securities and insurance products are offered through Cetera Investment Services LLC, member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Neither firm is affiliated with North Shore Bank or its related companies.  Investments are: • Not FDIC insured • May lose value • Not financial institution guaranteed • Not a deposit • Not insured by any federal government agency.
 

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