Key Takeaways
- Downsizing might save money, but it depends on various factors including real estate market conditions.
- Consider regular home expenses, major repairs, impact on other lifestyle spending, and emotional soft costs before deciding to downsize.
- List current expenses and compare them with those of a smaller home to evaluate potential savings.
- Be aware that downsizing may increase some costs, like living expenses in urban areas, and affect lifestyle choices.
- Evaluate emotional impacts of downsizing, such as parting with belongings and adjusting to new living arrangements.
Estimated reading time: 4 minutes
Often, there’s advice encouraging you to downsize for retirement.
It’s a way to save money when you’re on a fixed income.
But will downsizing really save you money?
Before you decide to sell your house and downsize, compare how your expenses will be impacted.
Some expenses you currently have may not change, whereas others may decrease.
It really depends on the real estate market in your location.
When deciding whether or not to downsize, consider these four factors: regular home expenses, major home repairs/replacements, impact on other spending, and soft costs.
1. Regular Home Expenses
Start by listing your current regular expenses associated with your house.
These are expenses you pay daily, weekly, monthly, quarterly, or yearly.
Here’s a list of regular expenses to help you begin:
Mortgage
Home insurance (be sure not to double count this expense if you escrow)
Property tax (be sure not to double count this expense if you escrow)
Home equity line
Homeowners Association fee and assessment
Home maintenance (cleaning, pest control, lawn care, HVAC annual maintenance, security, etc.)
Household supplies (paper products, cleaning supplies, etc.)
Utilities (electric, gas, water, trash, internet, phone, cable, etc.)
Next, estimate these expenses for a smaller house.
The amount you spend on household supplies and utilities may not change unless you significantly reduce your square footage.
If you intend to relocate to a different city, you may be surprised to find your expenses increase even though your new house has less square footage.
For example, if you are moving from a suburban area to an urban area, it may be more expensive to live in-town.
With this information, you can now compare the annual cost of your existing house with that of a smaller house.
2. Major Home Repairs/Replacements
The next set of expenses to evaluate is the cost of upcoming major repairs or replacements for your house.
These items tend to be expensive but are required less frequently.
For example, it includes replacing existing items such as your roof, water heater, windows, appliances, etc.
It also includes expensive but infrequent maintenance items, such as exterior painting, septic tank maintenance, etc.
Estimate the cost of these major home repairs/replacements for your current house and for a smaller house.
If the downsized house is new construction, these expenses will be minimal.
3. Impact On Other Spending
With downsizing, other lifestyle spending may be impacted.
For example, if you move to an urban area, your car expenses may be reduced because you’re walking more instead of driving.
However, you may need to pay for parking. And your car insurance may be higher in an urban area.
Another example is with your food-related spending.
In an urban area, you may spend more on dining out at nearby restaurants than on eating at home.
In this assessment, be realistic about your lifestyle changes and the impact on your spending.
4. Soft Costs
Another consideration is what I call “soft costs.”
There’s no monetary value to these costs, but they impact you emotionally.
When moving to a smaller house, you may need to part with some furniture.
Deciding what to discard can be difficult if you own sentimental pieces.
A smaller house may mean moving to a townhome or condominium.
Adjusting to shared walls, or even to less distance between you and your neighbors, may be difficult.
On the flip side, if you plan to travel more in retirement, you may welcome not having to worry about home maintenance and repairs.
While there’s no value to assign these soft costs, do consider them when assessing if downsizing makes sense for your finances.
Deciding whether or not to downsize in retirement depends on many factors.
Compare housing expenses, including both regular home maintenance and potential major repairs/replacements.
Also, consider the impact on other lifestyle spending and your emotions (the soft costs).
Remember, a house is a house, but a home is what you make it.
(Update to original post from July 30, 2019)
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA®, RICP®, is a Managing Director at Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing comprehensive financial plans, divorce financial reviews, and retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”