Downsizing Your Residence In Retirement

Many Baby Boomers will be downsizing their current residence at some point during retirement. People downsize for a lot of reasons: they retire, get divorced, want to save money, or just get tired of maintaining a big house and/or yard. Research shows that most people prefer single-family, one-story, low-maintenance homes, and most (69%) still want a yard or a garden.

Few things will have a bigger impact on your lifestyle or your financial plan than where you live. Housing is one of the biggest (if not the biggest) expense for most households, including retirees who do not have a mortgage.

The math behind downsizing:

Let’s take a look at the math behind downsizing. Suppose you sell a house that you own free and clear for $800,000 and buy one costing $400,000. We will assume that the sales commissions, moving expenses, and fixing up the new house add up to roughly 10% of your selling price ($80,000). That leaves $320,000 after the purchase of the new residence that can be added to your savings.

That $320,000 could enable a retiree to withdraw an extra $12,000 from savings (inflation adjusted) every year. On top of that, the retiree would likely have lower household expenses (maintenance, utilities, insurance, etc.), which could easily be an additional $6,000 a year. That’s $18,000 a year in extra income. You can estimate for yourself the potential saving a change in residence may have for you. Check out this super cool: Downsizing Savings Calculator.

Relocating to another state:

One more piece of the puzzle: Last year, we wrote about relocating in retirement. In that article, we stated that 40% of people who plan to relocate (and possibly downsize in the process) will move to a different state. You should consider how such a move will affect your taxes. Naturally, federal income tax rates are the same no matter where you live. However, state income tax, property taxes, and even sales taxes vary considerably. I know that analyzing tax jurisdictions is not most people’s idea of a fun date night activity. However, if our hypothetical downsizing from the $800,000 house to the $400,000 house involved a move from Nevada to New York (just as an example), all of the forecasted additional income ($18,000 per year) could be eaten up by higher taxes (all of which are higher in NY than NV).

For your convenience, we made the research easy with the maps and resources below:

State Income Tax: See breakdown of State Income Tax rates (pgs 4-7).

Property Taxes: The map below shows the average amount of residential property tax actually paid, expressed as a percentage of home value.



Sales Taxes: In addition to state-level sales taxes, 38 states have local-level sales taxes. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. The map below provides a population-weighted average of state and local sales taxes.



Interestingly, several of our clients who have downsized their residences have commented to us that they wish they would have done it even sooner. Thoughts, questions, comments…send us an email.