Wade Pfau, Ph.D., CFA

Should You Downsize in Retirement?

One method for freeing home equity for other uses is to downsize your home as a part of moving. Downsizing could mean either moving to a smaller home, or moving into a similar-sized home in a less expensive community.

The arithmetic is fairly basic. If you’ve paid off your mortgage and live in a $300,000 home, and then sell it and move into a $200,000 home, then $100,000 of your home equity has been freed for other uses.

Another possibility is simply to sell your home and then rent an apartment. Renting frees up home equity and provides more optionality and flexibility to make more frequent moves before settling down.

When analyzing the decision to rent or buy, you’ll need to consider factors such as the loss of build-up in home equity and its subsequent growth (or loss), savings on property taxes and other types of home maintenance, but also the ongoing expense for rent that will add up significantly over long periods of time.

As a part of downsizing, you could consider moving to an active community for adults, which may be less expensive and provide organized activities and social support. These types of communities generally do not provide health care or assisted living options. Continuing Care Retirement Communities can instead be an option if you want to make a move that will also cover potential long-term care needs in the future without an additional move outside of the CCRC campus. There are differences in home ownership with these options, as CCRCs generally provide a right to have access to housing (up through nursing care) for life rather than tangible equity in a home.

If you are looking to downsize for financial reasons, you may wish to first consider whether there are opportunities through local governments for property tax deferral or other possibilities. Other options include renting out a portion of your existing home, or to open a reverse mortgage.

An important caveat about the downsizing option is that it can be dangerous to assume downsizing as an important part of your retirement income plan. A study of retirees conducted by Merrill Lynch and AgeWave found what they refer to as a “Downsize Surprise,” in which many retirees who planned to downsize end up not wanting to do so once they have retired.

The survey, composed of of retirees aged 50 and older, revealed that 37% have moved in retirement, another 27% have not moved but anticipate moving at some point, and 36% of retirees do not anticipate moving in retirement. For those not planning to move, the most important reason provided was “I love my home.”

The top reasons for moving included wanting to be closer to family and wanting to reduce home expenses. For those who have moved since retirement, 51% moved to a smaller home, 19% to a same-sized home, and 30% to a larger home. For those who chose to upsize, the most important reason given was to have more space for family members (including the grandchildren who have joined the family) to visit.

The AgeWave study makes clear that downsizing is not the only moving option for retirees, and it should not necessarily be assumed that downsizing will happen.

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