It’s a question we get frequently from clients who are nearing retirement: “Should I think about downsizing, or maybe relocating to someplace less expensive? Or should I just stay where I am?” All three are certainly viable alternatives, depending on the particular situation, and all three come with various financial and non-financial implications for a person’s retirement lifestyle.
Lots of people approaching retirement are asking these questions, by the way. Some estimates indicate that 51% of retirees age 50+ will move into a smaller dwelling in retirement. As for relocation, according to statistics compiled by the US Census Bureau, people who decide to move as a result of retirement are three times as likely to leave their current home state as those moving for work-related reasons. Of all the people who retired and moved away from home, a remarkable 47% decided to leave their home state. Further, one of the top reasons cited by those planning to relocate in retirement is seeking a lower cost of living—which, when you think about it, is also a kind of downsizing.
The fact is, both downsizing and relocating require some careful thinking and planning. Let’s take a look at some things you consider, whether you’re looking at moving into a smaller place, or relocating to an area where you can live more inexpensively—or some combination of both.
What to Think about When Downsizing
The number-one advantage that most folks are hoping to obtain is cutting costs. After all, with a smaller place, you can typically look forward to less maintenance, lower utility bills, smaller or no mortgage payments, and reduced property taxes. All these are powerful incentives for those who are looking to simplify their lives.
But remember: downsizing your home means you’re not just a seller; you’re also a buyer. This means that you need to be looking at the housing market from both sides of the table. We’ve all heard stories of people who eagerly sold in a hot market for sellers, then had trouble finding a suitable place to buy at the price level they were hoping for. Also, think about current interest rates. Though most retirees may expect to get enough cash from the sale of a home that is either fully paid or has substantial equity to buy a new place outright, those who may need a mortgage loan to purchase the new home could be swapping a relatively low rate for a much higher one. This could dilute the financial advantages they were hoping to gain by owning a smaller place.
You should also consider the emotional pros and cons. Selling a home that you’ve lived in for decades—where you raised your children and established yourself in a neighborhood—can be traumatic. And if your new home is located at a distance from the place you’re selling, what about your community? Will you still be able to enjoy the relationships with friends and neighbors that you’ve built over the years? Maintaining social ties is a significant ingredient of a satisfying retirement lifestyle. Before you move into a new place, consider whether it will support this vital aspect of your life.
What to Think about When Relocating
The number-one thing on the minds of many who plan to relocate in retirement is taxes—which, for many, translates to “income taxes.” Many retirees look for states with no state income tax, and that is certainly a valid motivation. But there’s more than one tax to worry about.
If you’re buying a home in a new location, you need to consider the property tax situation. One of the main reasons you should pay close attention to property tax rates is that, unlike many retirement incomes, property values tend to rise, year over year. While that’s great for your net worth statement, it also means that over time, your property tax bill is likely to increase, even if your income (and your income tax) doesn’t. For many seniors, this can result in a double bind: higher and higher property taxes, coupled with static or decreasing income over time. In fact, even if the retirement home is mortgage-free, rising property taxes alone can sometimes create problems for persons living on a more or less fixed income. Fortunately, many states offer breaks on property taxes for seniors. For example, in Texas, seniors can exempt the first $10,000 of the value of their primary residence from property taxes, and certain local taxing authorities offer other exemptions. In South Carolina, seniors can exempt the first $50,000 of fair market value on their home, provided they are at least 65 and have been a legal resident of the state for at least a year.
Some Questions to Ask
If you’re considering downsizing:
- Will the new space allow me to do the things that are most important to me? (entertaining, gardening, spending time with grandkids, etc.)
- What are my main goals for downsizing? (Saving money, decluttering, reduced maintenance, etc.)
- How am I using the space I have now? Will the downsize still allow me enough room to live the way I prefer?
If you’re looking at a relocation:
- How does the cost of living compare? (including not only taxes but food, transportation, utilities, healthcare, etc.)
- What is the housing market like, compared to where I am now?
- What would I be able to enjoy there that I can’t enjoy here?
- Does the location better support my desired retirement lifestyle than where I am presently?
At Aspen Wealth Management, we understand that not all the important questions around retirement are financial. That’s why we strive to understand each client’s unique situation; this allows us to provide recommendations that put the client’s best interests foremost—guiding them toward their most satisfying lifestyle goals. To learn more about the planning topics of most interest to you, subscribe to our free Alexa skill, “Purposeful Planning.”