Smart Downsizing for Retirement: Watch Out for These 4 Common Traps

Make sure you dodge these hiccups when you’re downsizing for retirement or you will be sorry!

Have you been thinking about downsizing for retirement? There are many reasons you would like to downsize when it comes to your golden years, starting from finances to just wanting to move to another state, with many others in between!

What’s more, many of us have bought homes fit for our whole family, and now that the kids are out of the nest, the home sits mainly empty.

Sure. You can find things to do with your home to make up for the lack of people, but a lot of American retirees end up using their homes to be able to achieve their retirement dreams, meaning they end up downsizing in retirement, which helps them get the funds for other projects, such as moving to another state or just to move to a home that is easier to manage in their golden years.

Yet, downsizing can come along with a string of hidden issues that can end up drying up your nest egg and even cost you some of the peace and quiet you have been looking for.

If downsizing in retirement is what you have been after in the last couple of years, make sure that you keep on reading to discover some of the hidden hiccups that many do not pay attention to when they should have!

Have you been thinking of downsizing for retirement? Have you already done it? What are your plans? Let us know in the comments down below!

downsizing for retirement
Image By 3rdtimeluckystudio From Shutterstock

Real estate comes with high transaction costs

If you have not ended up selling a home before, know that there are a lot of fees associated with real estate sales. This is not to say that you will not turn a profit, but before you will be able to enjoy the sale of your bigger home and be able to put those towards acquiring your new downsized home, you will have to pay a couple of fees and taxes associated with the same.

Taking into consideration the average median home price, the seller of the home will have to pay around 10% of the total cost of the home in other types of costs, commissions, and fees, which will be around $43,700. This is not a small sum, and while the amount you are going to get for the home is going to be bigger, you should expect to have to pay these before, so make sure you are prepared.

What’s more, you are then going to have to buy another home, and when it comes to buyers of homes, you will be paying 5% of the cost of the home you are getting in fees to acquire the home. This means that for the same median price, you can expect about $21,800 paid by the person getting your home. This is about $65,500 in just transaction fees.

When you are going to get your new home, keep in mind that you should expect to have 5% of the amount of the home for those fees, so it is good to take this into consideration when you make your budget for your new downsized home.

Do not expect a small price tag

When it comes to downsizing for retirement, a lot of people do not expect the high prices that come along with real estate. This is also because the prices of houses have changed drastically in the last few years.

Take it like this: during the 2010s, home appreciation reached only up to 8.9% at its highest in 2013, generally oscillating between 5% and 6% each year. However, this has changed for good as the COVID-19 pandemic hit, making owning homes reach peak unaffordability.

Researchers and experts in the field report that prices for homes have risen each year: in 2020 by 11.3%, in 2021 by 17.8%, and in 2022 by 6.7%. While the last percentage seems to give us a good indication that the prices have stopped going up so high and fast, it does not change the fact that a home is going to cost significantly more than it used to a couple of years ago.

You may be happy when it comes to selling your bigger home, as it is good to sell when prices are high so you can turn a bigger profit, but in the long run, since you are downsizing, you may have to acquire a home that is not the best that the market has to offer since it is under-inventoried.

Do your research before you commit to buying when you are downsizing for retirement, and be open to the idea that it may take longer to find your perfect forever home for your golden years than you expected!

downsizing for retirement
Image By SewCreamStudio From Shutterstock

High prices come along with high taxes

You should be careful about the taxes that come along with downsizing for retirement. Selling your home in order to relocate or just to purchase a smaller one is the best way to go, but you should be careful as they are considered profits when it comes to capital gains taxes.

If you are a single filer, anything over $250,000 is going to be subject to taxation, while joint filers are looking at around $500,000. It may not be a problem for you, but a lot of downsizers in the last few years due to the rise in prices on the market ended up getting a profit that was close to the upper margin of the limit.

If you end up getting more than the limit, you are looking at up to 20% of the profit you have made from the home, which is not a small sum. Of course, the amount varies according to state, so make sure you check before you embark on this journey!

When you’re downsizing for retirement, it is good to know how to spot all the problems a certain property may have. Since not all of us are used to being able to spot these types of issues, we recommend you do some research on the topic. This book on how to be a confident house hunter from Amazon is what helped us a ton when we were house hunting!

downsizing for retirement
Image By Linaimages From Shutterstock

Think about the high emotional costs

While there are a lot of traps and hiccups that many people who are downsizing for retirement are not taking into consideration when it comes to finances, there are other types of issues that people tend to ignore. The mental health and emotional costs can be dire.

Selling your home can already be a pretty daunting experience, but when you factor in that you have built and raised your family there, it can start to be even harder to accept being gone.

What’s more, you can easily get swept into all the states and emotions of having to go through all your things, sort them out, donate them, and then find another home, buy it, renovate it if needed, and move.

Keep in mind that it can be stressful, so prepare accordingly, and never forget that you can take your time if it becomes overwhelming! Downsizing for retirement is no easy feat, but you’ve got this!

Sometimes, downsizing your home is not the only way in which you can be downsizing for retirement. Buying a new home is not the only option out there, and you can always find different ways to downsize that work for you. However, you need to be realistic and stick to certain things. If you are wondering how you can downsize without the added stress, make sure to check out our article on simple and effective downsizing here!


Leave a Comment

Your email address will not be published. Required fields are marked *

Recommended For You