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Downsizing for Retirement?

Downsizing for Retirement?

Are you looking forward to downsizing your residence? Empty nesters and retires often do so with hope of simplifying their lives; reducing costs; and potentially putting more money into their retirement portfolio. However, before you put the For Sale sign in our yard, consider the pros and cons.

UPSIDE TO DOWNSIZING

Downsizing your lifestyle can lead to a simpler and less stressful retirement. Decreasing overall spending can increase one’s sense of financial security during retirement years. Here are some potential benefits to making the decision to downsize:

  • Lower monthly mortgage or rent payments
  • reduced maintenance and upkeep
  • Decreased utility costs
  • Increased retirement savings with additional equity in your current home

DOWNSIDE TO DOWNSIZING

A common misconception is downsizing from the larger house to the smaller empty-nester residence mean you will have dollars left over after completion of both transactions. However, many times homeowners are surprised to fine the purchase price for a smaller, but newer house with desirable amenities, will cost more than proceeds received from the sale of their larger home. If this is the case, you may need to consider whether relocating really enhances your financial situation enough to overcome the higher investment in your home. Here are a few other costs to be aware of:

  • Realtor fees generally 5-6% of home’s sale price
  • Improvements needed to sell existing home, such as new windows, updated appliances, etc.
  • Moving costs
  • Purchase of new furniture, landscaping, etc.

BE AWARE OF TAX IMPLICATIONS

Tax implications are important factors when deciding to downsize. How does the property tax for the new home compare to your current residence? If your downsizing requires a move to a different state, will you pay more or less income or sales tax?

Another tax that may apply if you are selling a home that has appreciated in value is a longterm capital gains tax. Residential appreciation exceeding $250,000 for individuals or $500,000 for married couples will result in a capital gains tax on your federal income tax return for the year of the sale.

SUMMARY

As with all important decisions, there is more to downsize than the financial impact. The emotional, social and physically wellbeing of you and your family is also important to consider. If downsizing is in your future, be sure to include as many of the pros and cons as possible before putting the For Sale sign in your yard.

Abby VanDerHeyden, CFP, is a Financial Planner at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information visit their website at BedelFinancial.com or email to avanderheyden@bedelfinancial.com

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