When done right, downsizing your home can give you much-needed financial breathing room and help make your retirement years more memorable.

At least that’s the philosophy of retired New York City firefighter and fire science professor Pat Reynolds, age 72. When Reynolds and his wife Barbara retired in their mid-60s, they planned on spending a year in a 750-square-foot downtown Nashville apartment to “catch their breath” and let the financial dust settle after selling their 3,000-square-foot, 4-bedroom, single-family home in central Kentucky.

Instantly, the couple loved how much their new renter’s lifestyle changed for the better thanks to more free time and money to pursue their bucket list. No longer did they have to mow a half-acre lawn on weekends or stash away money each month in case of emergency maintenance. 

And the location wasn’t half bad, either: “We were right across the street from the opera house,” recalls Reynolds. “The apartment had floor-to-ceiling windows, and you could look right down Second Avenue in Nashville to see City Hall. When they put up the big Christmas tree, it was like the Christmas tree lit up our living room.”

Five years later, the couple are still die-hard renters, though they’ve upgraded to a slightly larger apartment in the suburbs. Their story illustrates how downsizing — swapping out your single-family home for a smaller place with lower maintenance and overhead — can often be the cherry on top of your retirement sundae.

Ahead, we go over the reasons to downsize your home — whether you’re looking to rent like the Reynolds family or buy a smaller house — and how to budget for a downsize. We’ll start with how today’s seniors in retirement can plan for the smoothest experience amid the recovering pandemic economy.

Is Now a Good Time to Downsize?

Buying and selling a house at the same time in today’s hot seller’s market requires forethought, but it isn’t impossible. 

Because there are fewer homes on the market than there are buyers right now, you probably won’t have trouble selling your larger home. You might even get to name your price and find that buyers are more likely to make offers without contingencies.

First decide on what you want to do first: sell your old house, or buy the new one. There are pros and cons to both. Selling your old house first might be the best choice in today’s market, since you’re likely to get a good offer. But if your heart is set on buying a specific type of home in a particular location, plan on being patient. You might have to outbid other buyers in today’s fast-moving seller’s market. (This is where becoming a renter may actually have an advantage.)

Before you do anything, determine your budget based on the value you expect to get from the sale of your existing home, and start tightening up your credit score now if you plan to finance your next home.

7 Reasons to Downsize in Retirement

Downsizing is a popular option for retirees who want to free up cash from the equity in their homes, either to re-invest in their portfolio or use as spending money to supplement their fixed income.

Here are some of the main reasons why retirees decide to downsize.

Maintenance Costs

Time equals money, and big houses require both time and money to maintain. Even if your house is totally paid off, you still might benefit from downsizing to a lower-maintenance home.

“Some people just get tired of doing all the maintenance that comes along with the big house,” says New York-based certified financial planner and founder of 2050 Wealth Partners, Lazetta Rainey Braxton. “They’re not able to cut the grass and do the hedges, repairs, and painting — all the costs associated with maintaining a large home in general.”

Lifestyle Changes

After all the years of waking to an alarm clock, pouring your coffee while standing up in the kitchen, and rushing out the door to get to work, retirement might be an opportunity for you to take up a new hobby, travel, or host the grandchildren for extended summer vacations. Moving into a smaller home with fixer-upper charm might give you the perfect project to work on at leisure. Or perhaps picking a scenic spot near the beach where the family can visit is what you have in mind.

Healthcare and Mobility

Some seniors downsize to a one-level rancher-style home or condo with wider hallways for better wheelchair access and senior-friendly features, such as walk-in showers with benches instead of bathtubs. Other aspects, like access to reputable hospitals or proximity to public transportation, become important to retirees.

Improved Cash Flow

Faced with the reality of a fixed income, some seniors opt to downsize so they can use a portion of the equity they had in their old home as spending money in retirement. The proceeds from your home sale may help supplement income from a pension, 401(k) or IRA, or social security.

Build a Better Nest Egg

If your monthly cash flow isn’t an issue, but you are concerned about running out of retirement savings when you’re 90 years old, you could invest some of the profit from selling your home into your retirement account. That way, it can continue to appreciate with the stock market.

Property Taxes

The amount you pay in property taxes is calculated based on the assessed value of your home. Moving to a smaller home can therefore reduce your annual property taxes — an added perk of downsizing.

Simplifying Your Life

Even if you’re not hurting for cash, downsizing your home can be a nice “fresh start” to your retirement. Jeanne Fisher, a certified financial planner in the greater Nashville area, says a common issue she sees her newly-retired clients face is realizing how much stuff they have accumulated over the years. 

“If you have a five-bedroom house, which I would say most middle-class Kentuckians have, you have five bedrooms of stuff. And then you probably have an outbuilding and a garage, and storage facilities. I mean, people accumulate a lot of stuff.” 

Before moving into their apartment, Reynolds and his wife “practiced” downsizing and living with less by traveling the country in an RV after retirement.

“We traveled to Florida living in literally two hundred square feet,” Reynolds recalls. Though it was an adjustment, it was the perfect way to adapt to a smaller place. When it came time to permanently move into their apartment, they were more than ready.

How to Budget for a Downsize 

Whatever your motivation – money, health, lifestyle — downsizing your home comes with lots of financial decisions.

For example, multi-family homes such as condos or townhomes might be easier to maintain, but they often come with HOA fees and other added costs like parking passes and/or facility fees. Meanwhile, staying in your existing home just because it’s fully paid off isn’t always the best bet, either.

It’s helpful to look at the big picture and ask yourself a few key questions to budget for your downsize.

1. What is your current monthly housing budget (including set-asides for maintenance, fees, utilities, taxes, etc.)?

Add up the annual cost of living in your current home and divide it by 12. If your home is paid off, add up annual costs of any upcoming repairs, projects, or renovations necessary to suit the house to your needs in retirement. Then, factor in other lifestyle costs like extra trips to see the family (if you live far away). This establishes your current monthly budget if you were to stay put where you are.

Once you see how your current standard of living costs you monthly, take a look at your assets. How many months or years will you be able to pay for your lifestyle with the cash savings, investments, and fixed income (social security and/or pension) you expect to use?

2. What’s your ideal financial situation?

If you’re not where you want to be financially, ask yourself what you need to do to get to your goal. Ask yourself these questions:

1. At what age do I want to start drawing on social security? (The earliest possible age is 62.)
2. Will the cost of living in my area go up? By how much?
3. What are my projected medical costs?
4. Is my vehicle paid off? Will I need to buy a new one in retirement?
5. Do I want to have a mortgage when I retire?
6. How much house can I comfortably afford?

3. How much will selling my home and buying a new home cost?

Factor in broker fees, closing costs, storage and movers, home inspection and repairs, and capital gains taxes. Any time you make a profit on selling a home, you have to report at least a portion, if not all, of the proceeds as income when you do your taxes. After calculating this step, ask whether selling your home is worth the expense. 

“Judge everything based on your assets,” advises Fisher. If your assets were going to last until you are 80 before you considered downsizing, compare that with the final number after you add in the equity you’d get from selling your home.

“If you come back and say, ‘OK, when I downsize to a home half the size of one I’m in, my assets are projected to last until age 90,’ then you can decide,” Fisher explains. “Test the impact of the change.”

“For some clients, if it only saves them a year or two years, and they really don’t want to leave the home, then maybe it’s not worth it.”

How to Plan a Downsize

If you determine it’s within your best interests to downsize, the next step is planning it out.

First, decide if you want to use a real estate agent or sell the home yourself. Next, ask what kind of home you want — rancher, condo, apartment, assisted-living community, retirement community, single family home. Get specific: How many bedrooms do you want, what’s the ideal square footage, what amenities do you want?

Last, determine your ideal timeline and whether you’ll be able to pay for the new home outright (like if your old house was paid off and you have enough in cash), or take out a mortgage. 

Interest-only mortgages are a unique option available to people over age 55. With this type of mortgage, borrowers only pay interest until they either pass away or go into long-term care (at which point, their assets are used to pay off the loan).

Not every mortgage lender offers interest-only loans. Before you apply for any mortgage, you’ll need to get preapproved.

Consider all the advantages and disadvantages of financing, even if you have enough cash to buy your new home. On one hand, it’s not quite ideal to have a mortgage payment while living on a fixed income, but with interest rates as low as they currently are, new retirees may decide to finance while they invest more in the stock market.

It’s all a matter of your ideal monthly cash flow and how you plan to use the equity in your old home.