Is Downsizing Part of Your Retirement Plan?

The financial crisis taught many individuals a harsh lesson about casting their financial lots with a single, illiquid asset: their homes. Median household net worth dropped by 35% between 2005 and 2010, according to U.S. Census Bureau data, driven largely by declining property values.

Yet home equity still makes up the greatest percentage of net worth in most households, accounting for more than $50,000 of the median household's net worth of $66,740 in 2010. And unlocking that home equity by downsizing is clearly part of the financial plan for many retirees and pre-retirees.

I recently asked participants in the Investing During Retirement forum on Morningstar.com to share their own strategies for home ownership during retirement. Did they plan to relocate to a smaller or more affordable home during retirement, or sit tight in their current abode?

Their responses showcased a range of approaches. Many posters noted that downsizing is very much part of their retirement plans, not just because moving makes good financial sense but also because they'd like to simplify, move to a different part of the country, and/or find a more senior-friendly home. Other readers noted that they plan to stay put at their current residences, even very large homes, because they can't part with their amenities or they love their locations. Still others noted that they don't need to downsize during retirement because they never "upsized" in the first place.

To read the complete thread, or share your own take on the downsizing-during-retirement debate, click here.

'We Wanted to Limit the Financial Bite in Retirement'
A number of posters in the thread said that they had already made the shift to a smaller home. Financial factors weren't the sole motivator for most of these moves, but they were definitely in the mix.

NormanR and his spouse, like many posters, said a little number-crunching--combined with desired lifestyle changes--pointed to the wisdom of scaling back their home space. "We [moved to a condo] because we wanted to limit the financial bite in retirement. Our evaluations included utilities, real estate taxes, and maintenance costs of a home versus a condo."

PaulT53 and his spouse have found that moving to a more modest abode helped free up cash for other pursuits. "We retired three years ago and downsized within a year. When we did the math, it was clear, and we said, 'What are we waiting for?' Our big house was $4,300 a month with taxes, utilities, repairs, insurance, mortgage, and so on. Its sale paid off its remaining mortgage and bought a beautiful new two-bedroom, two-bath, 1,500-square-foot penthouse condo with a 500-square-foot terrace. Our monthly costs are now around $1,500. This, and no more setting money aside for retirement (which we did while working), has given us more discretionary income in retirement than we had during our working years!"

Markyarts and his spouse have also seen a pickup in their discretionary income since they decided to downsize. "[We] sold the large house in northern New Jersey and moved to our small condo on the east coast of central Florida. The condo has no mortgage and the overall carrying costs (taxes, utilities, insurance, and homeowner association fees) are less than $10,000 per year. We paid more than that in real estate taxes alone on the house up north. This low housing cost has given us more discretionary money, and we've been using it for travel."

Markyarts wasn't the only one citing lower property taxes as an advantage of relocation and downsizing. Many posters noted that their homes were long since paid off, but the taxes just keep on coming. Jhamlin wrote, "I already downsized and never looked back. I live in Florida in a gated over-55 community in a ranch type home about 1,200 square feet. Property taxes being a homesteader are about $800 a year--a big difference from New Hampshire where they were $7,000 a year."

Lkosl3 and spouse also expect to see tax savings when they relocate from Long Island. "Taxes and insurance for our small home is approximately $1,000 per month. Thankfully our mortgage is paid. As part of our retirement saving, [we plan to sell] the house and downsize either to an inexpensive rental or co-op down in Florida where we have friends presently living. In Florida, [there is] no state income tax, and the cost of living is reasonable. Our retirement investments will go a lot further."

For Jenny and her husband, the decision to move was driven by a desire to remain on their own for as long as possible. "We recently downsized from a two-story house to an one-story house.Saving money is not the reason in this decision since we do not have mortgage on the old house, and selling the old house will result in capital gains tax. [Editor's Note: You'll only pay capital gains tax on a home sale if your individual gain is greater than $250,000 or $500,000 for couples, provided your sale meets other conditions.]The main reason is to prepare for the old age to be able to live independently as long as possible. An easier maintained home, a safer structure for elderly (no stairs), near shopping, and so on are desirable."

Several posters noted that they weren't just looking to downsize; they were also seeking a home with a floor plan and amenities that fit the way they live now.

Jmat58 wrote, "We want the 'big small house' spacious kitchen and family rooms, bedroom with master bath, and a guest room with bath. No living room, formal dining room, or study."

Less upkeep has been a gift that has kept on giving since SlowMoe and spouse relocated to an apartment in the city. "Anytime we took a trip while we were living in the single-family home I was always worried about the sump pump, the roof, burglars, did my friend mow the lawn, et cetera. The first trip we took after we moved into the apartment it was so nice not to have any concerns about our home. When we walked in the door after our trip [my loving wife] and I looked at each other and smiled; there was nothing that had to be done."

PaulT53 has felt a similar sense of relief. "Another important point to condo ownership is that the monthly fee pays for a very long list of chores and expenses we had with single-family home ownership. Such as lawn mowing/maintenance, landscaping work, snow removal, gutter cleaning, roof repair, water heater issues, plumbing, exterior painting, and so on. We now enjoy extensive travel care-free, relieved of all the home maintenance we once had to do."

Reducing the burden of ongoing upkeep is also a big motivator for ColonelDan and his spouse. "In pursuit of simplicity, increased free time and reduced expense, we'll downsize as yard work on an acre and maintenance of a 3,500 house becomes more than we want to bother with."

Dorameg is thinking about safety, in addition to lower maintenance. " I don't want to be stuck taking care of a large home. Safety is also a big consideration for me. I feel I would be an easy target for burglars and scam artists living alone in my home as I age." ​

Several posters noted that downsizing wasn't their sole motivation for moving during retirement: They also sought a change of scenery.

Some readers noted that they're enjoying oceans, mountains, or golf-course views. But Chablew and spouse are relishing city life. "We wanted (and got) a location with great views, tons of activities and walk-around amenities. Plenty of young people and boomers to meet and greet."

For Dcassat and spouse, the decision to downsize has been driven by "all of the above." "Downsizing involves relocation to a part of country my wife and I like. It involves lower cost of living; smaller home size, to reduce cost and taxes; and lastly relocation to take greater advantage of arts, education opportunities, and military retirement ( bases located nearby). All these factors were weighed in the final decision."'

A few posters noted that they'd like to downsize eventually, but they'd like to see the housing market recover before they do. Retpeddler wrote, "Yes, we are planning on downsizing. We are both 70 and our current house/yard is getting to be a lot more work than we want at this point in life. So, we'd like eventually get into something more manageable and that is closer to our children. However, we will not sell until the market comes back, which might be a few more years."

'Our Home Is Very Adequate for Us Today'
Yet as enthusiastic as some readers were about relocating, others were content to stay put.

Appentis1 and his spouse may downsize eventually, but for now they enjoy their proximity to family. "Our house, albeit larger than we really need, is still a center for family and extended family, and the extra space is welcome at times."

Meanwhile, Drpiranha noted that his well-appointed home not only offers the amenities he seeks, but he has much more time to enjoy it than in the past. "When I was working, my typical day was eight hours of work, a one-hour commute each way, one-hour prep time (shave, shower, and so on), eight hours of sleep. Waking home time: five hours. Retired waking home time: 16 hours. I'm spending more than 3 times the time in my home. Why would I want to constrict myself?"

The same holds true for Lenielsen and spouse, who actually enlarged their living quarters after retirement. "We upgraded to a new larger four-bedroom home on 2.5 acres in the country. We need extra space for a craft/sewing room, home office, and guest room. Also, we have room for a covered pad for our 38-foot motor home."

Several posters noted that they'd opted to upgrade their existing homes to suit their specifications rather than move. For Mdougherty1, a home base in Southern California now serves as a vacation retreat, thanks to some modifications. "Instead of going on vacations every year, we spent the money on making the backyard and surrounding property beautiful. There is absolutely no reason to downsize."

Johnep and spouse had their sights set on relocating but ultimately decided to upgrade their existing home because they love their locale. "We are in a suburban location but have a very private wooded lot which will be hard to duplicate elsewhere. Our home is very adequate for us today though I wonder how we coped with it when our children were home. We are fortunate that we have always had ranch-style homes without steps. My wife could not handle steps today, and who knows how long I will be able to navigate steps."

Among the posters who were staying put, several noted that their homes were well-suited to aging in place or could readily be adapted to suit their needs as they age.

Flyguy wrote, "We have looked at retirement places and decided to stay put for now. We have two stair-chairs so steps are no problem. Downsizing would mainly be an admission of defeat and at 79/80 we are not ready for that. Just had two cords of firewood delivered for this winter and as long as I can haul wood we'll enjoy the colder weather."

Rs0460a's home is ready for modifications, should they be necessary in the future. "While it's not a 'mansion' (two stories, 2,400 square feet), [our house] fits our needs/desires and we had it built with our retirement in mind (including 'aligned closets' on both floors to account for a future elevator)."

And while several of the downsizers cited onerous maintenance as an impetus to relocate, LuckyDog has a solution. "When we cannot take care of the place, work will be hired out."

Among the "staying put" contingent, several noted that they were doing so because their original home was a manageable size and maintenance and other costs are also reasonable.

Juris2 isn't ruling out relocating eventually, but doesn't have a need to downsize. "We 'rightsized' when we bought our first house (three bedrooms, 1.5 bathrooms, 1,800 square feet), which we still own (with no mortgage) after 36 years. We always kept housing costs modest, and housing prices in our town are low. There's no McMansion in our future."

In fact, Yakers chalks up modest housing costs to his family's financial success. "We have no plan to downsize. Our small house (1,000 square feet, two bedrooms, one bathroom) is one of the reasons we were to retire early. We paid it off and invested the mortgage payments."

'All Equally Important Pieces of Our Puzzle'
Yet even as some posters were unequivocal about their decisions to downsize or stay put, the decision is clearly a complex one that involves money, leisure, and creature comforts, as well as relationships, health, and values.

Hondo's post encapsulates some of the trade-offs. "We have discussed downsizing, but have not reached a final decision. My wife can no longer climb the stairs to the second floor, so we more or less live on the ground floor. The acreage is getting harder and harder for me to maintain myself. So yes, we will downsize at some point, but want to do it in the same area, because this is where our friends and most of our family live. This is our home."

Mtdoc59801 has also found the decision to be far from black and white. "Like many folks have mentioned, downsizing (moving) has many more considerations than purely financial ones. We are just over a year into retirement and I continue to work part-time, producing modest income, sense of purpose and time for thoughtful decisions. As reflected in the comments of others, community, health and health care, weather and proximity to family are all equally important pieces of our puzzle in addition to finances."

As JHAsheville put it, "I guess the reality is that everything is a trade-off!"

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