Anyone who has even a passing acquaintance with this blog knows that I am interested in downsizing -- primarily because I'm smack dab in the middle of the process myself. We sold our house last summer, and we're living in a one-bedroom condominium for the time being while we look for our more permanent retirement home.
I recently ran across this article from my friend Jeremy Kisner, who writes a blog for Surevest Wealth Management in Phoenix, Arizona. It was listed as one of his "best" articles of 2016. I've made a few minor changes for space and format, but the message remains the same:
Many Baby Boomers will downsize their
current residence at some point during retirement. People downsize for a
lot of reasons: they retire, get divorced, want to save money, or just
get tired of maintaining a big house and/or yard. Research shows that
most people prefer single-family, one-story, low maintenance homes, and
most (69%) still want a yard or a garden.
Few things will have a bigger impact on your lifestyle or your
financial plan than where you live. Housing is one of the biggest (if
not the biggest) expense for most households, including retirees who do
not have a mortgage.
Let’s take a look at the math behind downsizing. Suppose you sell a
house that you own free and clear for $800,000 and buy one costing
$400,000. We will assume that the sales commissions, moving expenses,
and fixing up the new house add up to roughly 10% of your selling price
($80k). That leaves $320,000 after the purchase of the new residence
that can be added to your savings.
That $320,000 could enable a retiree to withdraw an extra $12,000
from savings (inflation adjusted) every year. On top of that, the
retiree would likely have lower household expenses (maintenance,
utilities, insurance, etc.), which could easily be an additional $6,000 a
year. That’s $18,000 a year in extra available funds. You can estimate for
yourself the potential saving a change in residence may have for you.
Check out this super cool: Downsizing Savings Calculator.
One more piece of the puzzle: Last year, in the article Relocating in Retirement, we pointed out that 40% of people who plan to relocate (and
possibly downsize in the process) will move to a different state. You
should consider how such a move will affect your taxes. Naturally,
federal income tax rates are the same no matter where you live. However,
state income tax, property taxes, and even sales taxes vary
considerably. I know that analyzing tax jurisdictions is not most
people’s idea of a fun date-night activity. However, if our hypothetical
downsizing from the $800k house to the $400k house involved a move from
Nevada to New York (just as an example), all of the forecasted
additional income ($18,000 per year) could be eaten up by higher taxes
(all of which are higher in NY than NV).
For your convenience, we made the research easy with the maps and resources below:
State Income Tax: See breakdown of State Income Tax rates (pgs. 4 - 7).
Property Taxes: The map below shows the average amount of residential property tax actually paid, expressed as a percentage of home value.
Sales Taxes: In addition to state-level sales taxes,
38 states have local-level sales taxes. These rates can be substantial,
so a state with a moderate statewide sales tax rate could actually have
a very high combined state and local rate compared to other states. The
map below provides a population-weighted average of state and local
Interestingly, several of our clients who have downsized their
residences have commented that they wish they would have done it
Sorry if it's hard to read those state tax numbers -- I could only make them so big -- but you get the idea, the darker the color the higher the tax. Anyway, I don't know what your experience has been in downsizing (and I also know some people have "upsized" in the sense that they've purchased a second home in the Sunbelt for their winter activities -- but that's a different issue.) But I for one have no regrets selling off the old house, with its high taxes, high maintenance and extensive lawn care.
Now, if we could just make up our minds about where we want to go from here . . .