Should you retire in your current home or downsize to a smaller house?

Downsizing sounds like an appealing option for many retirees. You move to a smaller house, or even downsize into an apartment, and live on less money each month. But downshifting your living space isn’t always as easy as it sounds. When you downsize, you give up a lot of the luxuries and conveniences you were austomed to in your bigger home.

If you plan to downsize to a smaller home in retirement, here are some things to consider:

  1. The tax advantages of downsizing. When you sell your current home and buy a new, smaller one in a less expensive area, it can free up a lot of cash. As long as the house you’re selling has been your principal residence, you do not have to pay tax on any gain from the sale because of the principal residence exemption. Because there’s no tax on the sale, this creates the opportunity to invest the profits from the sale into other investments in order to supplement your retirement income.
  2. Your cost of moving. If you buy a new, smaller home to downsize into, keep in mind that there are closing costs, attorney fees, title insurance and property taxes. Not to mention the cost and stress of moving all of your belongings. Unless you have kids able to carry your furniture, you’ll have to pay a moving company to lift and haul your heavy items which can be an expense that some retirees don’t take into account until the move happens.
  3. Space will be an issue. If you downsize, you will probably downsize into a smaller bedroom. For many older adults, their master bedroom is a sanctuary where they unwind and relax. In retirement, your living room will likely be the largest room in your new, smaller living space, so keep that in mind when tour houses that the living room is where you will likely be spending the majority of your time. Besides the bedroom, your downsized home will also have less storage space for your clothes, books and other belongings. If you’ve amassed a large clothing collection in your old age, you will likely have to sell or donate a large portion of your clothes so they can fit in the small closet you’ll have in your new home.
  4. The value of your new home. As you consider a move to a smaller house, understand that the value of the house will have an impact on your overall net worth when it comes time to sell. Even if you buy in an attractive neighbourhood, remember that certain elements of the market are unpredictable, so while some homes may be selling at record high prices today, you never know what the market will be like in three years (when you might want to sell).

On the other hand, you could decide not to sell your house and choose to live in your current home during retirement instead. This option has some benefits that downshifting to a smaller home doesn’t offer such as:

  1. Comfort and familiarity. This option is particularly attractive to seniors who do not want to downsize just yet. If you’ve lived in the same house for a long time, living in your current home could be more comfortable, and you know where everything is so you won’t have to waste time looking for items.
  2. You maintain status quo. If you choose to downsize into a smaller home, not only do you lose some of the luxuries that come with your larger house, but it also telegraphs to everyone around you that you’re downgrading your lifestyle and downgrading financially, which can be embarrassing for some people to convey especially in front of their peers who may not downsize.
  3. The lifestyle you want. You bought your current home with a specific lifestyle in mind, and you may not want to give up some of the amenities (such as an in-ground pool) that make your current house desirable.

Staying in your current, large home might also have some downsides such as:

  1. Your cost of upkeep. If you are one of the many people who plan to stay put in your retirement years, keep in mind that there will be higher costs associated with home ownership as you deal with inflation and rising energy costs. You’ll have utility bills, yard work and potential repairs or renovations on the horizon that your current budget might not be able to afford once you transition to a fixed income.
  2. Proximity to family members. Retirees who downsize into a new home might be closer physically to their children or grandchildren who have moved away from where your original home is currently located.
  3. A larger property is a higher risk for falls. If you downsize, you will likely downsize into a smaller home with less square footage on a single floor. This can be more manageable for seniors who are struggling with balance and mobility.

Do not underestimate how much your house might be worth when you decide to sell it some day. Your local real estate market will impact the overall price that you can get for your house, but if the housing market in your area is on the rise and houses are in high demand, you may be sitting on an asset that you can make a lot of money on if it’s a seller’s market. It may make sense to take advantage of the housing market timing and sell your property so you can downsize to a place in a different area that you can afford, while having a surplus of cash from the sale of your previous house.

In conclusion, it’s never too early to start planning for your retirement and the home you’ll be living in. At Pension Solutions Canada, we specialize in assisting people in preparing for retirement. Allow us to evaluate and review your retirement income sources and assist you with retirement planning. Call us at 1-888-554-6661, or click here to book a virtual Zoom meeting.

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