Is Downsizing Right For You?

Posted: Updated:
(Image courtesy of Bedel Financial Consulting Inc.) (Image courtesy of Bedel Financial Consulting Inc.)

Last year was the best year for existing home sales in 11 years according to the National Association of Realtors. That's quite an enticement for many homeowners to put their house on the market and downsize to a smaller home. It sounds like a smart move, but is it?

Once you get older and your children are no longer living at home, downsizing to a smaller house may sound appealing. Doing so could help simplify your life, reduce expenses, and possibly allow you to set more money aside for retirement. But before you make the move, you need to understand the pluses and minuses of downsizing for your particular situation.

The Upside

Moving to a smaller house can definitely lead to a simpler lifestyle. And simple is good, right? Lowering your overall spending can also enhance your sense of financial security after retirement. Here are some other potential pluses:

  • Lower or no monthly mortgage payment
  • Reduced maintenance and upkeep
  • Decreased utility costs
  • Increased retirement stability due to expense reductions

Along with the quantifiable upside to downsizing, a reduction in stress will be inevitable if you are able to get better organized and toss items that you no longer want or need when moving to your new home.

There's Always a Downside

One common misconception is that downsizing means you'll have extra cash in the bank after you sell your larger home and purchase a smaller one. While this sounds logical, it isn't necessarily true. The cost of a smaller, newer house, featuring the latest amenities, often will cost more than you’ll receive from the sale of your existing home. Before you sign on the dotted line, determine if relocating would actually enhance your financial situation and not hinder it.

Here are a few costs you need to consider:

  • Realtor fees. When selling your home, these typically run 5 to 6 percent of the home's sale price.
  • Improvements and renovations. What will you need to do to sell your existing home? Will it entail a small expense such as applying fresh paint or take a big chunk of change such as installing a new roof?
  • Moving costs.
  • Enhancements to your new home. You will likely want to make the home yours with new furniture, enhanced landscaping, and other improvements.
  • Condo or neighborhood association fees.

Don't Forget The Tax Implications!

Consider the tax impact of downsizing before making a purchase offer on a new house. How does the property tax for the new home compare to your current residence? If you're debating downsizing to a home in a different state, will you pay more or less state income tax? And what is the sales tax in that state?

You may also subject yourself to capital gains tax if the home you're selling has appreciated in value. If you recognize appreciation in excess of $250,000 for individuals ($500,000 for married couples) when you sell your home, you will have to pay capital gains tax on the amount that exceeds the threshold in the year of the sale. If this is a possibility, consult with your tax professional.

Setting a Budget Is Key

Put together a comprehensive budget for the sale, purchase, and move. You'll also want to include any anticipated expenses after you're settled in your new home. This will be key for enhancing your financial security now, and in the future.

If you've made a good move and have actually reduced expenses by downsizing, make sure you put aside an appropriate amount for future necessities before spending it on little extras or vast luxuries. If you’ve downsized so you can travel more or work less, stick to your budget and don't go overboard. It's easy to do!

Summary

As with all major decisions, there's more to downsizing than the financial impact. The emotional, social, and physical wellbeing of you and your family is also important to consider. If downsizing is in your future, be sure to consider the pros and cons before getting serious about your move. If this could be your last move, make sure it's a good one!

Kathy Hower, CFP, is Director of Financial Planning and Senior Wealth Advisor at Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at BedelFinancial.com or email Kathy.

  • Perspectives

    • Do You Make These Top 5 Marketing Mistakes?

      Picture this: You’re the CEO of a multi-million dollar company. In just a few short years, you have led your firm in quickly become a rising star within your industry. Now, you’re ready to make your entrance into the big leagues known at this year’s premier tradeshow. The only problem is that your rapid growth has outpaced your "DIY" marketing. And to be taken seriously at the next level, your company needs a strong marketing message that clearly...

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • French Lick Resort Details $17M Expansion

      French Lick Resort has announced plans for a $17 million expansion project. The Orange County venue says construction has already begun on a six-story guestroom addition and new sports bar, which is expected to be complete in the fall of 2019. The project will add 56 guestrooms to French Lick, bringing the total number of rooms to 742 between the resort's two hotels. Both parts of the project, which will total more than 54,000 square feet, are being built near French Lick Casino.

    • Thor Set to Become Largest RV Maker in The World

      Elkhart-based Thor Industries Inc. (NYSE: THO) has announced an agreement to acquire a German recreational vehicle manufacturer for approximately $2.4 billion. Once complete, Thor says the deal for Erwin Hymer Group SE will create the world's largest RV maker. EHG currently employs more than 7,300 globally and its RVs are sold through a network of over 1,200 retailers. The companies say they expect no change in employee headcount or number of facilities as a result of...

    • Sigstr Locks Down $4M in Funding

      The head of an Indianapolis marketing tech company that has secured another multi-million dollar round of funding says there are multiple benefits to its location in the Hoosier State. Email signature and relationship marketing platform Sigstr has landed $4 million from investors led by New Jersey-based Edison Partners. Chief Executive Officer Bryan Wade attributes Sigstr's rapid upward trajectory to factors including...

    • TRIMEDX to Acquire Healthcare Technologies Business

      Indianapolis-based TRIMEDX has announced plans to acquire the healthcare technologies division of Philadelphia-based Aramark (NYSE: ARMK). The clinical engineering services company says the $300 million deal will allow it to deliver its services to a broader set of healthcare providers.

    • Do You Make These Top 5 Marketing Mistakes?

      Picture this: You’re the CEO of a multi-million dollar company. In just a few short years, you have led your firm in quickly become a rising star within your industry. Now, you’re ready to make your entrance into the big leagues known at this year’s premier tradeshow. The only problem is that your rapid growth has outpaced your "DIY" marketing. And to be taken seriously at the next level, your company needs a strong marketing message that clearly...