As seniors journey into and through their retirement years, a significant number of them will seriously contemplate the advantages of downsizing – selling that oversized two-story house where you raised the kids, and spending the (considerable) profit on a smaller, tidier, easier to maintain and cheaper to own house in the community of your dreams. It’s a tempting vision, and for many seniors it represents the best way to maintain independence and live within their means in an environment better suited for aging in place.

But that idyllic picture doesn’t tell the whole story – and like anything else connected with retirement, clear-eyed planning is needed before your dreams of downsizing cause you to make hasty decisions. In this recent New York Times article, reporter Susan Garland uses the example of a couple living right here in AgingOptions’ backyard in the Pacific Northwest to highlight the reality that the decision to sell a home and downsize doesn’t come without hidden, unexpected costs and delays. The message is not that downsizing is a bad idea – but it’s a big step that requires preparation and foresight. (Note that a subscription is required to access the New York Times article.)

More Expenses, More Headaches than Anticipated

Garland begins with the story of two couples, Louise and Charles Kiss from Washington State, and Dale and Marion Boyd from Georgia. Both were caught off guard by the intricacies of the housing market, but for opposite reasons.

The Kisses decided to downsize in 2018 by selling their four-bedroom split-level house in Bellevue, a Seattle suburb, and moving to a two-bedroom unit at a continuing care facility. It seemed like the perfect plan – at first. 

But the financial headaches piled up fast. Garland writes, “Despite the hot Seattle-area housing market, their house did not sell until they spent $20,000 to remove the popcorn ceilings and renovate the kitchen. The delay in getting money from the sale forced them to take out a bridge loan to pay the community’s hefty entrance fee on their new apartment.”

For the Boyds, the story was a bit different. Instead of a delay, they put their four-bedroom ranch house in Georgia up for sale thinking they would have time to find a new place during the period while the listing was active. The house sold in one day.

Garland writes, “Two weeks later, [the Boyds] placed much of their furniture in storage and moved to a rental house, where they lived for nine months, at $2,000 a month. In the meantime, they signed a contract for a house that had not yet been built. They moved into it in July.” That’s a lot of added stress, storage costs, and rent money wasted.

Reality Check on Housing Costs

While frustrating, these challenges can usually be avoided by doing a bit of research into the housing market before you leap to downsize.

“Older homeowners should consult with several real estate agents and appraisers to get a realistic picture of what their house might sell for and what smaller homes might cost,” Garland writes. “This is particularly important to do right now. Though local markets differ, empty nesters hoping to make a killing on the sale of the family home may be disappointed. Rising mortgage rates and a declining stock market are making it more difficult for younger home seekers with families to afford the down payment and monthly payments for a large, pricey home.”

Pandemic Delayed the Decision to Move

According to Garland, there are a few factors complicating the process for those who want to downsize. Since many older homeowners delayed their downsizing during the worst of the pandemic, homes are now lingering on the market. Sale prices have dropped since mortgage rates have begun to rise. Moreover, older buyers are now competing with younger ones for smaller, less expensive houses.

Seniors also need to be honest about how much they expect to save by downsizing. In the Times piece, Garland writes, “In addition to determining sales prices, homeowners could figure out possible savings by comparing the expenses expected at a new place with those at their current place, experts say. One often overlooked line item for sellers: closing costs, which could reach between 8 percent and 10 percent of the sales price, according to the real estate website Zillow. Those typically include a 6 percent real estate agent commission, though sellers could try to negotiate a reduction to that charge. Moving costs and home staging, such as new paint, floors or remodeling, will also eat into profits.”

Monthly Fees Can Come as a Budget Surprise

It’s important to remember monthly fees in your budget if you’re hoping to move into a condominium or an independent home in planned retirement communities. “These homeowners association fees pay for security, grounds maintenance and amenities such as pools and fitness rooms. They are generally not tax-deductible and can range from $100 to more than $1,000 a month,” Garland explains.

She adds that it’s important for buyers to ask what the fees cover in full. “In some communities, for instance, they do not cover lawn care or parking,” she warns. (We might add the suggestion that condo buyers find out if there are any assessments planned for major repairs. Replacement of a roof, for example, can cost every condo owner in a complex many thousands of dollars in unplanned costs.)

Another consideration? Taxes, especially if you’re moving from one state to another. “States vary on how they tax retirement income, and property taxes differ by locality,” Garland explains. “Even if your new house is smaller than your old one, your property taxes may not drop, depending on the new home’s value and its tax rate.”

Don’t Forget to Budget for Capital Gains Tax

“If your house has appreciated significantly over the years,” Garland writes, “capital gains taxes could crimp cash proceeds from a sale. Homeowners who have owned and lived in their home for at least two of the five years before the sale could owe capital gains tax on any profit above $250,000 for singles and $500,000 for joint filers. Widows and widowers may be eligible for the $500,000 exclusion if they sell within two years of a spouse’s death and have not remarried at the time of the sale.”

She adds, “The long-term capital gains tax is generally zero percent, 15 percent or 20 percent, depending on one’s income during the year of the sale.”

Samantha Kennedy, a certified financial planner in Bellevue, advises some of her clients who owned highly appreciated homes to hold off on a sale until the year of their retirement, when their income would likely have dropped. She told Garland of the New York Times, “If your income is lower, you will have potentially lower capital gains tax.”

Kennedy also recommended that “homeowners who had experienced large home appreciation should gather their records of major improvements over the years, such as remodeling or a new roof. Sellers can reduce the taxable gain by adding those costs to the original purchase price of the house.”

Downsizing Can Cut Costs, Improve Cash Flow

Part of the appeal of downsizing is the assumption that utility costs, insurance, and property taxes on the new home will be less than the previous one, which can help bolster retirement income. Garland recommends, “Though a certified financial planner can help run the numbers, you can get some idea of the benefits by plugging your data into the move-or-stay-put calculator of the Center for Retirement Research at Boston College. You can use the same calculator if you are thinking of renting rather than buying after selling your house.”

Renting is a real option, in fact, for those who don’t want to deal with home maintenance. “And because closing costs can be steep, renting also may be a good option for downsizers who expect to move again within several years,” according to Kennedy.

Lifestyle Choice Goes Far Beyond Finances

Andrew Carle, the lead instructor of a graduate curriculum in senior housing administration at Georgetown University, encourages retirees looking to downsize to consider carefully the kind of life they want to lead after retirement. Along with health needs for the next five to ten years, Carle recommended: “Plan it the way you plan a lot of things in life. Do you want to be near the grandkids? Do you like the neighborhood you’re in? What are your interests and hobbies?”

For the Kisses and the Boyds, their considerations led them through the financial headaches. Dale Boyd said, “We moved for location and lifestyle, rather than finances. We wanted proximity to our kids and our friends and the neighborhood we lived in for many years.”

For the Kisses, it was about attending to future health issues, but also social interaction with other residents. “At the beginning, I had to get used to the fact that the place was so much smaller,” Louise Kiss said. “But I would walk to the lobby or the library or the rec room and hear a lecture in the auditorium, and I was fine.”

My Life, My Plan, My Way: Get Started on the Path to Retirement Success

At AgingOptions we believe the key to a secure retirement is the right retirement plan – yet statistics show that 70 percent of retirement plans fail. That’s why for nearly two decades we’ve been dedicated to the proposition that a carefully-crafted, fully comprehensive retirement plan is the best answer to virtually any contingency life may throw your way as you age.  Our slogan says it all: My Life, My Plan, My Way.

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The best way we know of to successfully blend all these elements together – finance, medical, housing, legal and family – is with a LifePlan from AgingOptions. Thousands of people have discovered the power of LifePlanning and we encourage you to the same. Simply visit our website and discover a world of retirement planning resources.  Make certain your retirement planning is truly comprehensive and complete with an AgingOptions LifePlan.  Age on!

(originally reported at www.nytimes.com)