Downsizing in Retirement: Pros and Cons
Friends of mine were talking about downsizing after they retired. The idea of having a smaller space to maintain was appealing. However, they decided against it for the time being, arguing that having more bedrooms and a bigger backyard was beneficial now that grandchildren were in the picture.
Another couple, also friends of mine, sold their home and moved into a two-bedroom rental apartment almost immediately after retiring. Yes, they have grandchildren. However, their health situation was such that repeated navigation of the stairs in their home and maintenance of the property was getting to be too much for them.
Some embrace downsizing. Others resist it for reasons both practical and emotional. In this blog post, I touch on a few ideas that I hope will be helpful in any decision-making that may lie before you.
What is Downsizing?
Typically, downsizing is the process of selling a larger home and moving to a smaller one. The property that is moved to may be bought or it may be rented. In addition to the issue of the size of the property, from the financial point of view, one of the major rationales for moving is to realize a tax-free capital gain on the sale of your old home that can then be used to help fund your retirement. In other words, you are trying to free up the growth in the value of your home over the last 20, 30, or more years so that it is available to you now.
Positive Reasons to Downsize
Pay off Your Mortgage or Other Debt
Although this is becoming increasingly common, retiring with a mortgage can be a major financial burden. A year ago, when interest rates were at rock bottom, hanging onto the mortgage may have made sense since home prices were going up in value, and money in the investment markets was also providing much better returns than the mortgage was costing you. Now, however, that’s all out the window. Interest rates have gone up while house prices and investment returns have gone down. Getting that debt out of the way removes the risk of getting caught without being able to pay it off.
In their fascinating annual Joe Debtor bankruptcy study, Hoyes Michalos observed that debtors aged 60 and older accounted for 12% of all insolvencies and accounted for the highest level of unsecured debt at $61,223. Getting out from under that debt, or avoiding it altogether, is a much less stressful way to start your retirement.
To Reduce Your Monthly Bills
This is fairly straightforward. All else being equal, the smaller your property, the less you need to pay to either heat or cool your house. Of course, if you buy a condominium with high condo or strata fees, then the relative advantages may disappear.
To Be Closer to Loved Ones
My wife and I have lived in London, Ontario for the last 21 years. Our two oldest daughters, their husbands, and new grandchild(!) live in Toronto. Although London is not that far away, occasional thoughts about downsizing have been accompanied by the idea that we could move closer to where they live. Any move toward Toronto, however, might mean giving up on the idea of freeing up the capital currently in our house.
To Reduce the Amount and Strain of Housework, Yard Work, and Maintenance
As we get older, our bodies tend to work a little less well. Aching joints don’t exactly inspire enthusiasm for mowing the lawn, shovelling the driveway, or washing the floor. Moving to a smaller home without any yard work required can make a difference in the energy available to do other things.
To Reduce Security Concerns When Away from Home for Extended Periods
Four years ago, my wife and I left London for six months in Japan. We were told by our home insurance broker that we should have someone look into our home every other day. Fortunately, we have great neighbours who were willing to do that for us. “Snowbirds” who leave for warmer climes for several months of the year have to do the same. Renting a small unit inside a secure apartment building with all the fire prevention infrastructure in place can make a substantial difference to your peace of mind while you are away.
To Free Up Extra Money for Retirement
This is the biggest pro of downsizing in my opinion, although you do not have to agree. No matter our situation, we all need a place to live. No matter our situation, we all need enough money to sustain ourselves. Some people retire with insufficient income from government programs, pensions, and personal savings to continue the lifestyle that they were leading while still earning an income. If you have a house, especially if it’s mortgage-free, then there is potentially a large chunk of untapped capital that you can free up to make up the difference.
Reasons Not to Downsize
You Need to Prepare Your Home for Sale
This is inevitably going to happen. About four years ago, my widowed neighbour died. When his executor arranged to put the house up for sale, it was sold “as is.” In other words, they didn’t do a lot to put it in tiptop saleable shape. You can choose to downsize yourself or your executor and heirs will do it for you. Either way, getting your money’s worth on the sale means putting some work into getting it ready. Having said that, if none of the pros of downsizing are particularly compelling, spending time and money to get your home in ready-to-sell shape is not very persuasive.
Frictional Costs of Selling and Moving are More than Expected
In addition to preparing your home for sale, whether that’s a paint job or a new roof, there are unavoidable costs associated with moving away from your home, especially if you buy another new place. Things to consider include commission for the realtor, legal fees, land transfer tax, moving expenses, potentially new furniture, and maybe storage costs for the things you want to hang onto but now lack the room for.
You Need to Downsize Your Possessions, too
Unless you go on the somewhat self-defeating path of paying for storage, you will need to declutter. Even if you don’t have packrat or hoarding tendencies, saying goodbye to certain things will require that decisions be made, often emotional decisions. You can begin by categorizing those things into five categories. 1. Things you will keep; 2. Things you are going to give away; 3. Things you are going to sell; 4. Things you are going to throw away; and 5. Things you are going to put into storage. You can find additional de-cluttering tips here. Alternatively, depending on where you live, you may be able to hire a business to help you with that process.
You May Need to Part with Your Friends and Neighbours
If you wish to downsize in the same general area, this may not be a problem. However, if you are contemplating moving to a different city, or even a different province, then your social network is going to experience a shock. While the change, especially if it means being closer to children and grandchildren, may be worth it, building up a new social circle may be more of a challenge than you are willing to tolerate.
You May Not Free Up as Much Money as You Hoped
Not all homeowners can expect a windfall from the sale of their property. If there aren’t any lower-cost places to live, then selling to free up extra money may not be justified. For example, from June 2021 to June 2022, the average home price in Toronto increased by 17.9%, from $1,021,900 to $1,204,900. While Regina also went up in that same period, homes there are not experiencing the same degree of change at a mere 3.5%. Average home prices last year were $317,900, increasing to $329,100 this year. It’s not just the percentage gain, of course. The difference in dollars is notable. $183,000 in Toronto versus $11,200 in Regina.
Your New Home is Too Small to Host Family Gatherings
This is more of an emotional reason than anything else because it’s always possible to make other arrangements. However, if you are used to hosting your children and grandchildren every Easter, Thanksgiving, and Christmas, not being able to do that anymore could be emotionally stressful.
You Cannot Enjoy Gardening Anymore
In his retirement, I discovered that my dad was a skilled gardener in a way I hadn’t realized before. I guess the farm boy in him loved to grow things. A couple of years before he died, he mentioned that they were thinking of downsizing. But, in a later conversation, he said that they weren’t talking about that anymore. I just left it like that, but I wonder how much of their decision not to move had to do with his desire to continue exercising his green thumb.
Losing Access to Your Healthcare Services
It is hard to find a family doctor. When we moved to London, we were fortunate to be referred to a physician who was just opening up her own medical practice. At the time, it was within easy walking distance of our home. Thanks to my kidney disease and subsequent transplant, I have been more concerned about having ready access to nephrologists, but certainly having a family doctor to help with preventative care and referrals to other healthcare services has been important. Moving elsewhere would put that kind of care, not to mention the thorough knowledge and experience of my wife’s and my respective medical histories, in jeopardy.
Parting with Your Home is Like Parting with Your Memories
My wife and I have lived in many different places during our marriage, although London certainly has been the longevity winner. For others, however, who have lived in the same home for decades, every corner or doorway tells a story of their history in that home, raising children, hosting dinners for friends and relatives, getting that new piece of furniture that still sits in its place… You get the idea. While for some a home may be just an assembly of concrete, wood, and mechanical equipment to provide shelter, for others, it is symbolic of family.
Finally, here are a few ideas of how you might go about downsizing, if indeed you are thinking of doing so. Depending on your particular circumstances not all of these may resonate with you.
Move to an Area with a Lower Cost of Living
Financial reasons are often a major consideration for downsizing.
Move to a Retirement Community
Being able to put the responsibilities onto someone else, starting in an independent living arrangement and progressing to greater care as needed, can be a valid reason and a great option.
Winterize Your Summer Vacation Home
You are retired. You don’t have to live near to your downtown workplace anymore.
Buy a Condo
If the goal is to downsize but not necessarily to move away from an urban or suburban neighbourhood, and you want the stability of ownership, this can work well.
Rent a Condo or Apartment
You do not need to immediately spend the proceeds of your home sale if you rent. You are at the mercy of your landlord, however.
Buy a Smaller House
Maybe all you need is a smaller house and yard that is easier to care for.
Move in with Your Kids
The proverbial “granny suite” (it seems that the grandfather is always presumed to have died already!). This can make sense. Perhaps you bring some of the capital from your house sale to this arrangement to allow for the extra space needed when another generation is added to the mix. This might require some negotiation with your other children, though, if there are any.
Don’t Downsize; Hire Extra Help
If you do not want to leave your home but find the upkeep a challenge, you can offload the maintenance, house cleaning, and yard work to professionals. This is not going to free up any money, however.
This is the 158th blog post for Russ Writes, first published on 2022-08-01.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.