In this episode of Next Act Ninjas, Rachael Van Pelt dives into the financial nuances of downsizing in retirement. Is your home equity tied up just as you're gearing up for your next adventure? Rachael breaks down the pros and cons, from the liberating financial benefits—like reduced living expenses and possibly living mortgage-free—to the potential pitfalls such as market timing and unexpected costs. Through the story of one couple who transitioned from a spacious Denver home to a townhome and a seasonal condo in Arizona, we explore how downsizing can significantly shape your lifestyle and financial health, making your Next Act not just manageable, but truly splendid. Join us as we unravel whether downsizing could be your ticket to a rejuvenated life, blending financial savvy with heartfelt lifestyle changes.
Chapters
01:08 The Financial Benefits of Downsizing
07:30 The Financial Costs of Downsizing
10:25 Is Downsizing Right for You?
Welcome back to Next Act Ninjas, the #1 podcast for mastering lifestyle longevity. I'm your host, Rachael Van Pelt, a retired healthspan scientist turned Realtor and coach. Today, I want to dive into the financial considerations around downsizing your home. Have you ever thought about downsizing as a way to free up some of your money in retirement? If so, you're not alone, because I think many pre-retirees find that a big chunk of their net worth is tied up in their home. So it only makes sense that we'd want to free up that money for our Next Act and perhaps simplify our lifestyle in the process. While on the surface, that sounds like a great strategy, I'm going to cover some of the pros and cons today so that you can decide for yourself if that strategy makes sense in your situation.
Let's start with the positives, the financial benefits of downsizing. The first, most obvious one, is reduced living expenses. Downsizing often means lower utility bills, lower property taxes, fewer maintenance costs. A smaller home is typically, although not always, more energy efficient as well, and that can mean lower energy costs. A smaller home usually requires, fewer furnishings and decor, and that can save you money. If there isn't much yard, you may have fewer landscaping costs as well. All of these little things can add up, which is great. Just imagine having extra cash every month simply because your home is smaller and more cost effective to manage. And then there's the potential for lower mortgage payments or maybe even living mortgage free. Selling your larger home and moving into a smaller, less expensive one can be just the ticket to saying goodbye to your monthly mortgage payment. That is, of course, assuming you have enough equity in your first home to pay cash for that smaller one. But even if you can't quite do that and you have to take out a small mortgage for that new home you downsized to, the lower monthly payments can bring your living expenses down quite nicely. In fact, that could be the perfect strategy to help you extend your wealthspan by as much as another decade.
Downsizing might even improve your cash flow. If you unlock more equity from the sale of your home than you need to purchase the smaller place, you could have a lump sum leftover after you buy that property. Better yet, if the home you're selling was your primary residence for at least two years, you're not going to have to pay capital gains taxes on up to $500,000 of that if you're married filing jointly. If you're single, $250,000. That freed-up money can be invested to boost your retirement savings or to fund other lifestyle pursuits.
Speaking of lifestyle, simplifying your life has its own financial rewards. If your new home has a smaller yard or no yard at all, or just generally needs less upkeep, that's not only going to save you money, it's going to save you time. And time is our greatest resources, isn't it? Freed-up time can be invested in other pursuits that bring you more joy, maybe even make you money. For example, what if instead of spending time maintaining that big home and yard, you instead spent that time managing a vacation property in a place you love?
Now I have a story about a couple, Dave and Ellen, who did just that. They spent nearly two decades living in a spacious five bedroom in South Denver. The home was perfect when they were raising their kids and hosting family holidays, but once the nest emptied and Dave retired, they began to reassess what they wanted in their next stage of life. Ellen was still active in her career and she was planning to work maybe another three to five years, whereas Dave was eager to start creating their retirement lifestyle.
Now luckily, they were both on the same page when it came to being motivated to simplify. They sold their large five bedroom home and they moved into a more manageable two bedroom townhome in North Denver. They did this to be near their daughter and grandkids, but also to save time and money. They were so happy to let go of maintaining their big yard and home and they also, were able to save time by not having to drive back and forth across Denver to help with their grandkids. Now better yet, they had money left over from the downsize that they were able to use as a down payment for a small two -bedroom condo in Arizona, a place called Lake Havasu City. It's known for its vibrant retirement community and has mild weather during winter and spring months when Colorado weather can be somewhat unpredictable.
So now that townhome in Denver serves as their primary residence. Ellen gets to continue to work. They both enjoy regular visits with their grandkids. And in the winter, they get to look forward to migrating to that Arizona getaway. That allows them to not only escape the cold, but they also get to engage with a new community. And they get to enjoy outdoor activities like boating and golfing that really aren't possible during Colorado's winter months. And they have a son who lives in Portland, Oregon. He loves to get away to Arizona during the dreary, drizzly Pacific Northwest winter months. So it's a win -win for the whole family. And that change has rejuvenated them so much, so much so that Ellen is even saying that she's no longer in a hurry to retire. The seasonal breaks have been just what the doctor ordered.
This major move and lifestyle shift was only financially feasible because they saved so much when they downsized. Of course, they have to manage their budget carefully because they're maintaining two homes, but the reduced upkeep, and the lower energy costs of their smaller homes make it possible. Now they get to spend less time and money on daily living and more on experiences and making new memories. Now they haven't done it yet, but they're starting to think about renting out their Lake Havasu place when they're not there, so they can increase cashflow in retirement. They're going to have their son help them with that in exchange for his being able to use it. And if Ellen's renewed vigor allows her to work just a couple more years, that's going to improve their financial situation even further. In short, downsizing and simplifying can be just the ticket to leveling up other areas of your life while still improving your financial situation.
On the other hand, we can't ignore the potential financial pitfalls of downsizing. Market fluctuations and timing can greatly affect your financial outcome. Downsizing at the wrong time could negatively impact your bottom line. Timing in the real estate market is crucial. If you sell your large home during a market downturn, you might not get as much equity out of it as you'd like. Conversely, if you're buying a smaller home during a market peak, can mean paying too much.
And if you're relocating, you might have to consider two very different markets. If you plan to stay in the same town, ideally you're going to want to downsized when the market is balanced. That's when it's not a strong seller's market or a strong buyer's market. An even better scenario if you're planning to relocate would be to sell your home when your area has tipped towards a seller's market, but to buy when the town you're moving to has tipped towards a buyer's market. But as you can probably imagine it's not likely these conditions are going to line up perfectly at exactly the time when you want to downsize. And let's face it, timing the market may not even be an option in some scenarios. If, for example, you are moving to be closer to your family and where they live isn't going to be a buyer's market anytime soon, waiting will not be in your best interest. And you're also going to want to consider the cost of selling and buying.
When you sell your home, there are realtor fees, closing costs, some home improvements sometimes. Likewise, when you buy a new place, there's going to be closing costs and moving expenses, potentially renovations or upgrades that you need to make. And those costs can add up and you should factor those into your decision to downsize. Emotional spending is another pitfall. It's far too easy to get carried away buying new furniture or items to fit that new smaller space. And that can erode any financial gains that you may get from downsizing. So you have to be careful with that.
And lastly, if you're underestimating the amount of space you need, that can pose a problem. Too big of a step down can lead to discomfort. It can even lead to the need to move again, which can be costly. I recently spoke with a couple who downsized to a small townhome only to realize shortly thereafter that they wished they'd bought a bigger place. They needed more room for their grandkids when they visit. After only one year in their townhome, they were already out shopping for a bigger space. So it is crucial to be realistic when you assess how much space you're going to need to live comfortably. Don't forget about visitors. Don't forget about your grandkids.
Bottom line, While downsizing can offer significant financial benefits, like reduced living expenses, improved cash flow, it's not without pitfalls. Market timing, cost of selling, buying, emotional spending, all of that can impact your financial outcome.
And remember, downsizing isn't the only way to achieve many of these financial goals. There are other ways for you to pull equity out of your home such as home equity lines of credit. Or, if you're over the age of 62, a home equity conversion mortgage, also known as a reverse mortgage. We touched on these tools in a previous episode when I interviewed financial expert Brady Mullen. I recommend, if you haven't listened to it already, go back and listen to that episode because there are multiple ways that you can improve your lifestyle and your financial situation simultaneously.
It's all about balance. If you're thinking about downsizing, you are going to want to carefully consider all of the financial risks and benefits we just covered. On the other hand, downsizing is also a deeply personal journey. It's not just about the financials, is it? It's about crafting the lifestyle you want for the years that you have left.
So ask yourself, what are my lifestyle preferences? What are my long -term goals? Will downsizing support those goals? Will it support both my healthspan and my wealthspan? Does it fit with the vision I have for my best Next Act?
When I consult with people, these are the kinds of questions I ask because you can't create a life you love without a clear vision. And there's no one-size-fits-all approach. For some, downsizing is exactly the right strategy. It is the way that they're going to step most powerfully into their Next Act. For others, downsizing is the beginning of the end. It catalyzes a contraction rather than an expansion of their Next Act. And that's the last thing you want to do. You don't want to prematurely shrink your life and accelerate the aging process. You gotta be careful when you're thinking about downsizing.
You're not downsizing your life. You're simplifying it so that you can upsize in other areas. If you're thinking about downsizing, let's chat. I can help you get crystal clear on what strategy is the best fit for you. In the meantime, please be sure to subscribe to this podcast and share with someone else in your tribe who is starting to think about their Next Act. Together, we can help more people win the long game.
Until next time, live well, love more, age less, my friends.