Thursday, January 12, 2017

The Costs and Benefits of Downsizing

     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 sales taxes.


     Interestingly, several of our clients who have downsized their residences have commented that they wish they would have done it even sooner.


      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 . . .

25 comments:

Olga Hebert said...

I really only keyed into the color intensity, but very interesting.

Linda Myers said...

We have second-sized for four or five months of the year into a 620-square-foot park model trailer in Tucson. We love the simplicity of life here.

But we haven't begun to downsize from our family home in a Seattle suburb. Too much stuff! Plus, we want to spend summers there, and if we sell, we probably won't be able to get back into the market. We are considering asking a couple of our kids if they'd like to rent from us. Cheap rent in the months we're in the guest room, less cheap when we're gone.

Terra Hangen said...

The charts are super useful and I clicked on them to enlarge them which works fine. I live in California, a state with terribly high income and property taxes, and our local sales tax is 9 percent! Of course lower heating bills in winter.

Stephen Hayes said...

Fascinating post. Oregon has a very high tax rate which is why we're considering a move once Mrs. C. is retired.

Carole said...

All good points for downsizing. The hard part is choosing where to live (as you know!). I've come to the conclusion there is no perfect city/state in which to live. In anticipation of downsizing, I am throwing away or donating things that we no longer need/want. It's a start.

RJ said...

An interesting post here but it is only part of the puzzle. If I were to sell my 2500 SF house on 3.5 acres here in Indiana and moved to California I would probably get a very small fixer-upper. If you are considering moving to another state do your homework first. What is the total cost of living? Every state has about the same cost of doing government and that is the total taxes levied. So many things to consider...

Barbara - said...

Maps like this show why you should take all costs into consideration. My former state of Texas, for example, shows no income tax-yet it has the highest property and sales taxes in the natio to make up for it (and it has toll roads everywhere, not just for commuters). The other thing I would add that is a little of the topic of what you wrote, is that getting rid of too much can be costly. I got rid of my sleigh bed, all my outdoors furniture and all my yard care stuff (mower and so on). I can promise you that even with the cost of a moving truck, I came out behind and would have been much better moving them, and then getting rid of them if not needed on this end. Rarely can you replace large items for an equal price, even if you are willing to look used.

still the lucky few said...

I took the big leap and sold my house 10 years ago. Since then I've been in a condo, and love it. There are times I regret selling so quickly (only 2 years into my retirement), mostly because that house would have been worth so much more now! Of course, buying a condo would cost more now, so it's all relative. Good luck, take your time, and make the right decision.

Anonymous said...

Vancouver Washington has high rents and homes are absolutely ridiculous, across the river is Portland highest cost of living in many areas, we don't get it schools are better in Washington state the kids go to school longer per school year and are funded differently than Portland schools..Yet people move here and commute like hell to Portland paying high state income tax with no benefits..That commute takes up all a person's waking hours, big snow storm this week and people are just screwed tooed and tattooed nothing open and the many who tried to eek out to this area abandoned their cars for what a JOB just over broke is what I call jobs here. Now if one lives in a suburb of Seattle things are different huge public transportation running 24/7 even in snow and ice..The city absolutely runs, people work 2 jobs up there but they WORK having lived her nearly 39 years come this June I would never buy or rent here no matter what I would just keep driving to KING county and work, if you do not work you are not going to be doing anything else!!!!!!!!!!!!!!!!!! We escape to the beach and enjoy our lives, we own a tiny home and are blessed it is teeny tiny corner lot and paid it off in 15 years and have saved all the time, we have lived simply and happily this is not heaven on earth!!!!!!!!!!!!!!!!!!!!!!!!

Tom Sightings said...

RJ, I don't really think that every state has about the same cost of doing government. Florida or Arizona, or Pennsylvania for that matter, have lower total taxes and lower costs of living than NY, NJ or CT, or CA. But for the most part, you get what you pay for. We raised our kids in top-notch school systems of suburban NY, and it was worth every penny. But while we continue to believe that we should do our part in supporting the community and our schools, it's just too much. It's no longer feasible to pay those taxes when you're not working and living on a fixed income.

Barbara, I agree that getting rid of too much can be costly. We already have a few regrets. Trouble is, it's hard to accurately predict what you're gonna need in the future -- and you can't keep it all.

And Carole, you're certainly right, there's no perfect place to live, this side of heaven. But figuring out all the trade-offs is a hard equation to solve. I should have taken more calculus!

retirementreflections said...

Interesting and timely post, Tom. I just finished reading an article which claims that "deciding where to live" is one of the main areas of stress for retired/retiring couples. Thank you for a very informative post.

Cindi said...

This is my second (and hopefully my last) experience with downsizing. I don't think I can comfortably live any smaller. Hubby and I moved from super expensive NY (3.5 acres) to less expensive Florida (1154 sq ft, 2bd, 2bth condo).
The other day one of the lights went out in the outside hallway. Hubby called management, it was repaired within the hour. Yesterday I called management to ask how I can clean the exterior of my windows (we're up on the 3rd floor) and if the windows can be inverted or something. No problem, they said. They scheduled the cleaning crew to come and clean my exterior windows! How's that for (free) service (all included in those HOA fees)? If we see a problem with bugs or snakes (yes.......! lots of construction going on)the solution is only a phone call away. At no charge.
After taking care of a big house and 3.5 acres, this condo living lifestyle) is sheer heaven!
Getting rid of our old stuff was just a Craigslist click away.
This is a new beginning for us and we started with all newish furniture (don't ask!)My old stuff wouldn't have suited the tropical lifestyle anyway. We're into minimalism now and it is a pleasure NOT to have any clutter or bulky maintenance equipment.
I agree....why didn't we think of this sooner?

DJan said...

When we moved here nine years ago we downsized considerably. We have maintained a smaller profile and enjoy it quite a lot. Renting isn't perfect, but it's what we will continue to do for the rest of our days. I see I live in one of the highest tax areas in the country. I sort of knew that already. :-)

Kathy @ SMART Living 365.com said...

Hi Tom! Great article....I agree with everything except the name! As you know I prefer to call it RIGHTSIZING because it sounds and feels like a positive move rather than a sacrifice or a giving up. When we moved to a smaller neighborhood 6 years ago and used our money to make our home free and clear it was the best, most liberating thing we ever did. Sure, now and then we think it might be nice to have a slightly bigger yard or more room to put "stuff" but in the end it keeps us easily within our budget and we now use our time doing things we love rather than just "managing" a big home. And I do tend to find some disagreement with authors who try to compare states and costs across the board. We live in southern California which shows up on high cost of living rates, but we bought in a down market, and picked a location that has wonderful amenities but is fairly reasonable . I think every state has some of those pockets but you do have to hunt them Out. Good thoughts though...thanks for sharing! ~Kathy

Jane said...

I figure I save about $7000/yr moving from NY to SC. While appreciated, it's's not really enough to justify major life change. My point is that a major move, not for the faint of heart, requires looking at the big picture... Climate, health care, etc. I also find the savings, like a raise when employed, gets quickly taken for granted. For my part, I have never been happier, even with the heat and humidity.

Debby said...

Ilive in California- I knew we paid high income taxes but compared to the rest of the country it's outrageous. I don't see us, though ever leaving. Our whole life is here.

schmidleysscribblins.com said...

Live simply, so others may simply live.

Madeline Kasian said...

We've lived in Arizona most of our lives,but our families are back in New Jersey where property taxes ASTOUND ME. You can retire there with a paid off mortgage and still have a very heavy monthly burden.We are retired now, and in Az. our taxes for a 2400 square foot home are just under 2000. We downsized from a 4000 sq. foot home a few years back.My husband loves to garden,I love the pool, hot tub, and entertaining. We reduced our monthly bills significantly with a smaller home ( homes in Arizona are just bigger.. I know it's relative..) and we have a healthy happy lifestyle in a great climate. If I didn't live here already,I would retire here!!!! I think property taxes could make or break a retirement!

gigihawaii said...

I like where I live, so I am not going to sell my house.

Tabor said...

Two quick considerations. Make sure if you downsize you keep physically active as you no longer have those stairs to use. I also went temporarily to a one bedroom condo and then moved to a two story house in retirement. The first month the stairs to the two guest bedrooms were difficult and tiring, but now they are very easy for me. Second, make sure that you remember that paying taxes means your get public services. I live in a moderately high tax state, but have amenities that are not found in low tax states.

Denise said...

Hi Tom!
Been lost for awhile.

Downsizing for us, has been decluttering, which is another blog. My goal is to leave as little as possible for the kids to do, without giving up what I love! I have been working with local historical societies in giving them historical pictures and items that would end up in a dumpster because my kids, born later in life, just don't know these people!

However, as I make strides, we downsized into a condo and I've got the garage looking good, my husband keeps bringing empty (good sturdy) boxes into our garage. Here's the thing. I am GETTING RID of stuff! But I do think as we (my friends and I) begin collecting items for prizes for our 50th Reunion, perhaps those boxes will be useful.

Meanwhile, he's driving me nuts.

Denise

Easin' Along said...

Tom,

Great article and very enlightening replies. Three years ago we decided to downsize before we retired in order to begin traveling within a few days of "hanging it up". Because we live in the beautiful foothills of East Tennessee where the cost of living is relatively low (no state income tax, low property taxes, affordable housing) there was never a discussion of moving to another state. Trading in a large home on eleven acres for a small home with enough yard for a few flowers was a good decision, but the best part was unloading 40 years of "stuff" in a three day garage sale. To say that the experience was liberating would be an understatement. I sometimes miss the solitude of our former home, but I cherish the freedom afforded by the new one.

Joared said...

Very interesting article. I continue to be dedicated to living in place. Considered various options long before I fully retired in terms of living needs, convenience, etc. -- am also downsizing household contents but not with eye to moving. I do live in a climate, Southern California, that is amenable to my preferred life style as an older person. Had my husband been well in our early retirement years I might have welcomed having small living quarters in a cooler climate we could have gone to for a few summer months, but so far my choice to stay here post his death a decade ago has been the correct one for me. More and more support systems have been becoming available should I need them as I age is an important consideration since my family all live elsewhere -- snowy & cold climates across the continent from me. Will be interested in reading more about your journey, decisions about where to settle, etc. Health considerations, whether a couple or single can have significant bearing on the choices we make.

Kathy said...

Thank you for this article. It sounds like we are all experiencing similar things. Purging my unnecessary stuff has been a theme for the last while and it feels so good to let.it.go.

Retirement for me is anywhere between 2 years away to 6, depending on where I choose to live. I have 3 adult children here in Southern California, no grandchildren, and a son in Raleigh, NC with my 2 grandchildren. Talk about a bicoastal heart! Looking at the charts it seems like the 2 areas have some similarities. I own a small 2 bedroom home here, which I could remain in, or buy a condo in Raleigh outright and have no mortgage. Any thoughts in terms of taxes and best financial freedom scenario?

I realize it is about more than a financial decision, but it is important one to this single lady. Thanks.

Teri said...

I loved reading all the comments. What about the states that tax retirement income - Shouldn't that be a factor?