December 10, 2024

Go Beyond Financial Considerations when Deciding to Downsize

8 minutes

Episode 310 – When you get past a certain age, downsizing always seems to sound like a good idea. But is it really? What are the really important considerations you need to keep in mind?

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Transcript of Podcast Episode 310

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, when is the best time to downsize your home?

It should be fairly simple. The kids have all grown up and moved out. You don’t need that big house anymore. You’re tired of all the maintenance and expense of running that place. So, it’s time to downsize. It’s really a pretty easy decision, isn’t it? Time to buy something smaller and start saving money.

Not so fast. You might change your mind when you really think about it and consider all the other factors. After a thorough review, you may realize that moving into a smaller home doesn’t always make financial sense. There can be many considerations. Here are just a few of the things you might want to think about before you make your move.

Financing. Do you like your three percent mortgage? It would be a shame if something happened to it. According to Bankrate, the current average interest rate on a 30-year fixed-rate mortgage is 6.92 percent.[1] If that’s higher than what you’re already paying, it could alter your plans.

Moving costs. If you’ve been in your house for a long time, you may be surprised by how much stuff you have accumulated, and moving it won’t be cheap. According to Zillow, if you’re relocating more than 100 miles away, the average moving charge is somewhere between $2,000 and $5,000.[2]But that’s not all. You may incur additional expenses if you have to move vehicles such as boats, cars or motorcycles, or if your new street or driveway is too narrow to accommodate a moving truck. There could also be additional expenses if there’s a delay with your new home and the moving company has to put your items in storage.

Capital gains taxes. We discussed this in detail back in episode 304. The good news is that there is a tax incentive that can help save money when you sell your residence and downsize. The first $250,000 in profit, or $500,000 for married couples, is free of capital gains tax. If your gain is less than that, you won’t have to pay any capital gains tax at all. But there are some rules you must follow. Among them, the home must be your primary residence for at least two of the last five years. Also, you can only use the exclusion once every two years.[3]

Insurance, including flood insurance. The cost of flood insurance has risen sharply over the last few years. If you need it, it averages about $96 per month as of October 2024.[4] You might not be paying it now, but you may have to if you move near the water.

HOA dues. Homeowners association dues can be very expensive and tend to rise with inflation. They average around $300 per month[5] but vary widely. It may end up costing you more than when you did it yourself. Also, you may give up some control when it comes to landscaping and exterior projects.

These are all important considerations, but not all of the factors you need to look at are purely financial. There are also personal and lifestyle reasons to review before you downsize. It’s best to give everything some serious thought before you take the plunge. Let’s take a look at some of these other issues:

Leaving family behind. What if you have children who live in several different states, some close to home, some in the new location? There’s no easy answer.

Leaving memories behind. You may have enjoyed some of the best years of your life in your family home. You might miss your old patio, swimming pool or backyard. Moving to a new community may be exciting but leaving your current community and friends can be difficult.

What if the kids move? It’s happened before. Job considerations could change everything not long after you arrive.

Medical care. You’re probably going to need to find new doctors at your new location. You may also want to examine the local hospitals and critical care facilities.

Home convenience. As you age, it may become more difficult to get up and down that set of stairs, so it may be time to look at a single-story home. You will also need to find a new plumber, electrician or lawn care specialist.

Entertainment. A place for vacation is not the same as a place for retirement. You may have lots of memories at your traditional family vacation spot, but are you going to get bored after a while?

One alternative to all this may be a simple dry run. Try renting a place in your new location for a few months and see how it goes. Have you made new friends? Do you have access to all the services you need? If you’re moving to be near family members, how are they responding?

The truth is that it’s often not really about downsizing and saving money. Very often what people are looking for is a better quality of life. But that can be hard to define. Enjoying a warmer climate and living near your children are a good start. But there’s also something to be said for trying to streamline your life. You won’t know until you try.

[1] Ostrowski, Jeff. “Compare current mortgage rates for today.” Bankrate.com. https://www.bankrate.com/mortgages/mortgage-rates/ (accessed Nov. 18, 2024)

[2] Zillow “How Much Does It Cost to Move?” Zillow.com. https://www.zillow.com/learn/how-much-does-it-cost-to-move/ (accessed Nov. 18, 2024)

[3] Taylor, Kelley R. “Capital Gains Tax Exclusion for Homeowners: What to Know.” Kiplinger.com. https://www.kiplinger.com/taxes/capital-gains-home-sale-exclusion (accessed October 11, 2024).

[4] Metz, Jason. “How Much Does Flood Insurance Cost?” Forbes.com. https://www.forbes.com/advisor/homeowners-insurance/flood-insurance-cost/ (accessed Nov. 19, 2024)

[5] iPropertyManagement “HOA Statistics.” iPropertyMangement.com. https://ipropertymanagement.com/research/hoa-statistics (accessed Nov. 19, 2024)

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