This article was reviewed by Jay Brecknell, CFP®.
Should we sell our family home and use the money to fund our retirement? With many retirees finding themselves in the “sandwich generation,” supporting their children and elderly parents, the temptation to sell the family home to generate some extra income can be appealing. So can visions of reducing your chores, living a more minimalist lifestyle, and spending more time on hobbies and travel.
But while many might entertain the idea, it turns out the number of Canadians selling their homes has been declining since the mid-90’s. And many Canadian retirees say they intend to stay in their home, paying for home care as needed, instead of moving to a smaller home or a retirement facility. From changes in the market to lifestyle considerations, there are many factors to discuss when determining if downsizing is right for you in your retirement.
What should you consider when thinking about downsizing?
When thinking about downsizing, it’s important to do your research and consider both the lifestyle and financial implications of your decision. Selling your home may not get you the income boost for your retirement that you think it will. Talking with a real estate advisor and financial planner will help you best understand your options.
Downsizing might be the right option for you, but there are many factors that retirees fail to realize that could reduce the amount of money they actually receive from their home sale, and that could affect their retirement plan.
Why do so many retirees think about downsizing their homes?
Often, the topic of downsizing comes up for one of three reasons:
- Lifestyle: moving to a smaller home means less maintenance and more freedom (time and financial) for travelling, hobbies, family, etc.
- Monetary: selling your home could mean an influx of money that could be used to fund your retirement, including travel. It also means less money spent on house maintenance.
- Health and Vitality: taking care of a home takes a level of effort that can be difficult to maintain as you age. Plus, your home may not be set up for aging in place.
Each of these is a valid reason to consider downsizing your home, but there are some crucial considerations when making a decision about where you want to live in your retirement.
What are the key things to consider before downsizing?
Deciding to sell your home and downsize is a big decision. There are many lifestyle and financial implications to consider. Not to mention the emotional impacts of moving. From a financial perspective, we recommend considering:
- Your vision for retirement—lifestyle, hobbies, vacations and travel, how do you want to spend your golden years?
- The current market value of your home, and how much a new home would cost.
- Understanding the additional costs associated with moving.
This isn’t the kind of decision we recommend making just on feelings and dreams alone. It’s important to consider the practical realities of what downsizing will mean for your finances and retirement plans.
Does it fit your retirement plan?
Owning a home demands a lot of responsibility, and perhaps, you feel like your home has become more of a burden than a sanctuary. You are considering downsizing because you envision less time spent on home maintenance and more time on your hobbies, making memories with loved ones, and relaxing after a lifetime of hard work. But is downsizing actually going to give you the lifestyle you dream of? Here are some key questions to ask yourself:
- Do you want to live in the bustle of the city, or would you like to move to a smaller town where the pace of life slows down?
- Are you prepared to downsize your possessions to fit into a smaller space?
- Is it important to you to stay close to friends and family? Or are you willing to move further away to get a home within the price range you are seeking?
- When exploring areas to live, have you factored in practical considerations such as proximity to medical care?
- Being accustomed to living in a detached home, are you prepared for close-proximity living, strata rules and restrictions, and how that may affect your standard of living?
Where you live will greatly influence the lifestyle you enjoy during your retirement. Knowing how you want to spend your retirement is an important factor in deciding if you want to downsize your home and move. Get clear about your lifestyle goals first. Once you have that vision, consider the size, location, layout/functionalities, and cost of a home that will best support this vision.
How much is your home worth compared to what a new home will actually cost?
One of the biggest mistakes retirees make is overestimating the sale price of their home and underestimating how much a new home will cost. Many assume they will have a lot more money left over than the housing market actually supports. It’s very important to do your research in advance.
You can peruse online sites like Realtor or work with a local real estate agent to better understand what your dream retirement home is going to cost you. Don’t forget to factor in expenses like strata fees and property taxes! With today’s market, you may need to purchase a much smaller home or move farther away than you anticipate.
Renting is a tempting proposition for some retirees. The train of thought is: sell their home, invest the equity, and use the home sale proceeds to pay the rent while it earns a return. You could save money on maintenance costs this way—not to mention the reduced stress of caring for a property. But this idea certainly has its drawbacks, like fluctuating rent costs (on a fixed income, a 2% rental increase each year can make your condo unaffordable over time), stability issues (a landlord could evict to make room for a family member or because they’ve sold the home), and less control over your living space.
As with everything in life, there are pros and cons, and by discussing with your financial planner and real estate advisor, you can make an educated decision about what home option works best for you.
Don’t forget the added costs
Purchasing a new home is only one of the many costs associated with downsizing. At Cedar Rock, we regularly remind clients of the additional expenses that need to be factored into their calculations when moving. These costs include:
- Moving fees
- Closing costs
- Land transfer taxes
- Home inspections and appraisal fees
- Realtor and legal fees
- New furniture to fit the smaller space
These costs can easily absorb 15% or more of your home sale proceeds. If these aren’t factored into your calculations, you can wind up with significantly less funds than you anticipated, which can affect things like cash flow, travel plans, and other retirement lifestyle highlights you had been looking forward to.
The emotional costs
If you haven’t moved in a while, you may have forgotten the emotional toll moving can have on you. Your home is filled with memories, making saying goodbye challenging. Downsizing also means getting rid of a lot of your possessions, which many people find challenging. Boxes of memorabilia, decor items you’ve grown attached to, even things like sporting goods, can be hard to get rid of when they represent a past version of yourself (or an idealized future version).
Moving is often stressful. Completing all of the upgrades and renovations to enhance the value of your home pre-sale. Having to keep your home clean and leave for showings takes a toll if your house is on the market for any length of time. Trying to outbid other interested buyers on that perfect condo you found. Decluttering and packing, organizing movers, unpacking and finding new furniture for the new home is a lot of work. This can be a very exciting time, but it also tends to be taxing, and the effects of this aren’t to be minimized.
Is downsizing in retirement right for you?
Ultimately, only you can answer that. But having a conversation about downsizing with your financial planner will help you get a clear understanding of how it will impact your finances and your retirement plans. There are many factors to consider, and it’s a big decision. It’s important to take your time, weigh the pros and cons, do your research, and then make the decision you feel is best for you. Whatever you decide, we’ll help maximize your finances to support you in retirement.
Frequently Asked Questions
1. Should I downsize my home in retirement?
Downsizing can be the right decision for some retirees, but it’s important to look beyond the idea of simply “unlocking equity.” Your lifestyle goals, health needs, retirement plan, and the true costs of moving all play a role in determining whether downsizing makes sense for you. Taking the time to research your options and speak with both a financial planner and a real estate advisor can help you make a more informed decision.
2. Why do retirees consider downsizing?
Many retirees begin considering downsizing for three primary reasons: lifestyle, monetary benefits, and health or vitality concerns. Some want less maintenance and more freedom to travel or pursue hobbies, while others are hoping to reduce expenses or generate additional retirement income from the sale of their home. For others, maintaining a large home simply becomes more difficult with age.
3. What financial factors should I consider before downsizing?
Before selling your home, it’s important to understand how downsizing fits into your overall retirement plan. You should consider the current value of your home, the cost of purchasing a new property, any potential tax implications, and the additional costs associated with moving. Downsizing is a major financial decision, and relying solely on assumptions or emotions can lead to unexpected challenges later on.
4. What is the biggest mistake retirees make when considering downsizing?
One of the biggest mistakes retirees make is overestimating how much money they’ll walk away with after selling their home. Many underestimate the cost of a new property and forget about expenses such as moving fees, closing costs, land transfer taxes, realtor and legal fees, and even new furniture for a smaller space. These added costs can consume 15% or more of the proceeds from the home sale.
5. What are the non-financial challenges of downsizing?
Downsizing is not only a financial decision. It can also be emotionally difficult. Homes often hold decades of memories, and letting go of possessions tied to different stages of life can be challenging. The moving process itself can also be stressful, from preparing the home for sale to packing, decluttering, organizing movers, and adjusting to a new living space. While exciting for some, downsizing can also be emotionally and physically demanding.