Downsizing and Housing Decisions in Retirement
Housing is typically the largest expense in retirement. Deciding whether to stay in your current home, downsize to a smaller property, or switch to renting involves financial calculations and lifestyle considerations. This guide walks through the numbers to help you make an informed decision.
Understanding Your Current Housing Costs
Before evaluating options, calculate what you currently spend on housing. Many homeowners underestimate total costs by focusing only on their mortgage payment.
Common homeownership costs:
| Expense Category | Typical Annual Cost |
|---|---|
| Mortgage payment (P&I) | Varies by loan |
| Property taxes | 0.5-2.5% of home value |
| Homeowners insurance | $1,500-3,500 |
| Maintenance and repairs | 1-2% of home value |
| HOA fees (if applicable) | $0-6,000+ |
| Utilities | $2,400-4,800 |
Example: Current home worth $500,000
| Expense | Annual Cost |
|---|---|
| Mortgage (paid off) | $0 |
| Property taxes (1.5%) | $7,500 |
| Insurance | $2,400 |
| Maintenance (1.5%) | $7,500 |
| Utilities | $3,600 |
| Total Annual Cost | $21,000 |
Even without a mortgage, this homeowner spends $21,000 per year on housing. Maintenance costs tend to increase as homes age, and property taxes typically rise over time.
Calculating Net Proceeds from a Home Sale
When you sell your home, the amount you receive is less than the sale price. Understanding these costs helps you plan accurately.
Typical selling costs:
| Cost Category | Percentage/Amount |
|---|---|
| Real estate commissions | 5-6% of sale price |
| Title insurance and fees | 0.5-1% |
| Transfer taxes | 0-2% (varies by location) |
| Closing costs | 1-2% |
| Repairs/staging | $2,000-10,000 |
| Moving expenses | $2,000-8,000 |
Total selling costs typically range from 8-10% of the sale price.
Example: Selling a $500,000 home
| Item | Amount |
|---|---|
| Sale price | $500,000 |
| Real estate commissions (5.5%) | -$27,500 |
| Title and closing costs (1.5%) | -$7,500 |
| Transfer taxes (1%) | -$5,000 |
| Pre-sale repairs | -$5,000 |
| Moving costs | -$5,000 |
| Net Proceeds | $450,000 |
The seller receives $450,000 from a $500,000 sale, a reduction of 10%.
Worked Example: Selling $500,000 Home, Buying $300,000 Condo
Margaret, age 67, owns a $500,000 single-family home free and clear. She's considering downsizing to a $300,000 condo. Here's how the numbers work out:
Step 1: Calculate net proceeds from sale
| Item | Amount |
|---|---|
| Sale price | $500,000 |
| Total selling costs (9%) | -$45,000 |
| Net proceeds | $455,000 |
Step 2: Calculate purchase costs for new condo
| Item | Amount |
|---|---|
| Purchase price | $300,000 |
| Closing costs (2-3%) | $7,500 |
| Moving expenses | $4,000 |
| Initial updates/furnishing | $5,000 |
| Total outlay | $316,500 |
Step 3: Calculate freed-up capital
| Calculation | Amount |
|---|---|
| Net proceeds from sale | $455,000 |
| Minus purchase costs | -$316,500 |
| Capital freed up | $138,500 |
Margaret now has $138,500 in additional investable assets. At a 4% withdrawal rate, this could provide approximately $5,540 per year in retirement income.
Step 4: Compare ongoing costs
| Expense | Old Home ($500K) | New Condo ($300K) |
|---|---|---|
| Property taxes | $7,500 | $4,500 |
| Insurance | $2,400 | $1,200 |
| Maintenance | $7,500 | $1,500 |
| HOA fees | $0 | $4,800 |
| Utilities | $3,600 | $2,400 |
| Total Annual | $21,000 | $14,400 |
Margaret saves $6,600 per year in ongoing costs and has $138,500 in additional capital. Her total annual benefit is approximately $12,140 ($6,600 savings plus $5,540 from invested capital).
Rent vs. Own Analysis
Some retirees choose to rent rather than buy a smaller home. This decision involves comparing ongoing costs and considering how long you expect to live in the new location.
Renting advantages:
- No maintenance responsibilities
- Flexibility to relocate
- No capital tied up in property
- Predictable monthly costs (during lease term)
Renting disadvantages:
- No equity building
- Rent increases over time
- Less control over living space
- Potential for lease non-renewal
Example comparison: Buy $300,000 condo vs. rent similar unit for $2,200/month
| Cost Category | Buy Condo | Rent |
|---|---|---|
| Monthly payment | $0 (paid cash) | $2,200 |
| Property taxes | $375/month | $0 |
| Insurance | $100/month | $25/month (renter's) |
| HOA fees | $400/month | $0 |
| Maintenance | $125/month | $0 |
| Utilities | $200/month | $200/month |
| Monthly Total | $1,200 | $2,425 |
| Annual Total | $14,400 | $29,100 |
The condo costs $14,700 less per year. However, buying requires $300,000 in capital. If that $300,000 were invested at 5% annually, it would generate $15,000 per year.
Break-even analysis:
| Scenario | Annual Housing Cost | Investment Income | Net Cost |
|---|---|---|---|
| Buy condo | $14,400 | $0 | $14,400 |
| Rent + invest | $29,100 | $15,000 | $14,100 |
In this example, renting while investing the capital results in similar net costs. The decision then depends on other factors: Do you want maintenance responsibilities? Do you expect to move again? What are local rent trends?
Capital Gains Tax Considerations
When selling your primary residence, you may owe capital gains tax on appreciation above certain exclusion amounts:
| Filing Status | Exclusion Amount |
|---|---|
| Single | $250,000 |
| Married filing jointly | $500,000 |
To qualify, you must have owned and lived in the home for at least 2 of the past 5 years.
Example:
- Purchase price 25 years ago: $150,000
- Improvements over time: $50,000
- Cost basis: $200,000
- Sale price: $500,000
- Gain: $300,000
- Exclusion (married): $500,000
- Taxable gain: $0
If the gain exceeds the exclusion, the excess is taxed at long-term capital gains rates (0%, 15%, or 20% depending on income).
Location Considerations
Moving to a different area can significantly affect your housing costs and overall retirement budget:
| Factor | Impact on Costs |
|---|---|
| State income tax | 0% to 13%+ depending on state |
| Property tax rates | 0.3% to 2.5% of home value |
| Sales tax | 0% to 10%+ |
| Cost of living | Varies significantly by region |
| Healthcare access | Proximity to medical facilities |
Some retirees save substantially by moving from high-cost to lower-cost areas. Others find that being near family, healthcare, or familiar communities outweighs potential savings.
Timing Your Housing Transition
Consider these timing factors:
Age-related considerations:
- Moving earlier (60s) allows time to establish new routines and relationships
- Moving later (70s+) may be more difficult physically and emotionally
- Some prefer to move before health issues arise
Market considerations:
- Housing markets fluctuate
- Interest rates affect both selling and buying
- Seasonal variations in buyer activity
Personal readiness:
- Emotional attachment to current home
- Readiness to declutter and downsize possessions
- Family proximity and support
Checklist: Evaluating Housing Decisions
- Calculate total current housing costs including maintenance (1-2% of home value annually)
- Estimate net proceeds from selling your home after all costs (typically 8-10% reduction)
- Research property values and costs in potential new locations
- Compare ongoing costs: current home vs. smaller home vs. renting
- Calculate capital gains and determine if you qualify for the exclusion
- Consider HOA fees, rules, and financial stability if buying a condo
- Factor in moving costs ($2,000-8,000 or more for long distances)
- Research property taxes, state income tax, and cost of living in new locations
- Visit potential new areas multiple times and in different seasons
- Consider proximity to family, healthcare, and activities you enjoy
- Evaluate whether renting makes sense based on how long you'll stay
- Discuss the decision with family members who may be affected