"While downsizing in retirement makes sense for some people, it’s not a given that it will work for you," said Kiplinger last week. "And it pays to consider the benefits of staying in your home before rushing to put it on the market."
There are two main components to a decision to downsize:
- The possible financial benefits
- The potential emotional and psychological costs
Let's look at each in turn.
Financial Advantages of Downsizing
There are often tangible and significant financial benefits to downsizing:
- Releasing home equity (the amount by which a home's market value exceeds any mortgage balance(s)) that's been building for years or decades
- Reducing homeownership expenses that are tied to the size of the home such as: property taxes, homeowners insurance, homeowners' association (HOA) fees, utility bills, maintenance, and repairs
- Cutting any costs for domestic cleaning and yard work that is currently outsourced
- Selling furniture, antiques, artwork, ornaments, and so on that won't fit in the new, smaller home
- If moving to a retiree-focused planned unit development (PUD) in a sunny state, it may be possible to sell one or more vehicles and rely on a golf cart, which is much less costly to run
However, Kiplinger's point is that too many people add up those potential savings and decide to downsize before weighing the potential costs.
Some Downsides
Just the process of moving can be wildly expensive:
- Real estate agents' commissions
- Attorney's or other fees for closing
- Moving company's bills
- Possible capital gains tax (CGT) liability
And then there are continuing costs. It's fine if one's moving around the corner to a smaller home in the same neighborhood.
But those relocating to a different state or into a retirement community need to check their likely costs carefully. How will a different state's income, property and sales taxes affect the household budget?
How much are the HOA fees in a retirement community? Those with lots of amenities can have astronomical bills, especially when one adds in special assessments.
Sander Scott, a broker at Net Real Estate, told Kiplinger, "[Retirees] consider condos or smaller properties in an effort to seek relief from the responsibility of maintenance and to save money. They may soon discover that they haven't eliminated those costs so much as simply shifted them somewhere else."
Emotional and Psychological Costs
Those who have lived in their current home for decades will likely feel an emotional wrench when they leave. Chances are, they've made some of their happiest memories there. Maybe they raised their kids in the house.
Those moving some distance away will be leaving their support network behind: perhaps family and likely friends, not to mention a multitude of familiar faces and places, from the doctor's office to the church and from one's favorite stores and restaurants to those local happy places many of us have.
Of course, some may be moving to be closer to the children, and others are gregarious life-and-soul-of-the-party types who can instantly make friends anywhere. But many others are shy and take years to build bonds in a new, unfamiliar locale.
It's worth recognizing, though, that financial reality sometimes means seniors have no choice but to bite the bullet and endure these emotional and psychological costs.
"Over the past two decades, the number of senior households considered severely cost burdened — those spending more than half their income on housing — has nearly doubled, rising from 5.2 million to nearly 11.7 million, according to American Community Survey data," said the Urban Institute last year. "And the share of severely cost–burdened senior households has increased. In 2000, 11.5 percent of households headed by someone 50 or older were severely cost burdened. By 2020, the share increased to more than 16 percent."
Who thinks these pressures have lessened over the last year? Or are likely to reduce anytime soon?
A Growing Problem
Boomers are so-called because they were born during a post-war boom in births. The birth rate dipped somewhat after that boom.
Baby boomers were born between 1946 and 1964, which means the youngest will be 62 years old this year. In 2023, the Joint Center for Housing Studies of Harvard University looked at the implications of this demographic phenomenon.
"The US population of older adults, defined as those at least 65 years old, is increasing at historic rates, up 34 percent from 43 million in 2012 to 58 million in 2022," said the Harvard study. "This growth is widespread, with urban, suburban, and rural communities across the country reporting increases in older residents. Within the decade, the first baby boomers will turn age 80, accelerating the rate of growth among those in the oldest age groups."
The report was correct. This year we're seeing the oldest baby boomers become octogenarians, and those numbers will only increase from here.
"As the nation’s population of older adults swells, so, too, does demand for housing that is both affordable and able to accommodate older adults’ changing needs," continued the report. "Housing is expensive for many older adults, whose incomes often are fixed or decline over time."
Sadly, Harvard reports this is already an acute problem for many boomers, with new levels of homelessness among seniors. Yes, government programs are supposed to address this, but underfunding means some elderly folks have to remain unhoused for years before they can get the help they need.
Just because some boomers enjoyed unparalleled prosperity in their lives doesn't mean they all did. Many are forced to work well past retirement age to survive, and some of those who can't are living in abject poverty.
