5 Downsizing Mistakes That Turn a Home Sale Into a Retirement Setback
With the cost of everything rising around us, seniors may be leaning toward downsizing to boost their retirement savings.
According to MyPerfectResume’s new Retirement Reality Gap Report, 35% of American workers admitted that their expected retirement timeline has moved back over the last three years. The survey found that 64% cited the rising cost of living as the main reason preventing them from retiring as early as they had hoped.
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While it can be tempting to downsize, you can’t ignore these mistakes that could cost you way more in retirement and become a financial setback.
1. Earning Less Money Than You Expected
“People run the math on the sale price and forget commissions, concessions, repairs found in inspection, the payoff on a line of credit they forgot was secured by the house, and moving costs,” said Alex Rodino, a Realtor with Keller Williams Coastal Area Partners and the founder of The ARC Platform. “The gap between the number in their head and the wire at closing is often the thing that breaks the plan for the next house.”
Even if your sale goes according to plan, the harsh reality is that you can earn much less money than expected when you factor in all the expenses. As exciting as it is to look at how much your home can sell for, you want to run the calculations to try to determine what you walk away with.
2. Assuming the Exclusion Covers You
“The exclusion on a primary residence is $250,000 of gain if you’re single and $500,000 if you’re married filing jointly, and it has not been adjusted for inflation since 1997,” Rodin said.
If you purchased your home in the 1990s, you may have realized a gain of well over $500,000. This means that you’ll want to discuss the possible tax consequences with your accountant before you list, not after you close the transaction.
3. The Cost of Buying a Small Place Can Be Significant
Leah Sajovits, a Realtor with Douglas Elliman Real Estate, said that a common mistake is assuming that downsizing automatically means expenses will be lower, which isn’t always the case. A retired couple can sell a large family home to move into a smaller condo, but now they have HOA fees, possible assessments and higher insurance premiums to worry about. Retirees may be surprised by how much higher property taxes and insurance rates are in other locations.
“Cutting your floor area by a third doesn’t cut your premium by a third, and moving toward the water, which is exactly what a lot of retirees here want to do, can raise it outright,” Rodin said.
It’s important that you run the numbers on your potential new place because you can’t assume that it will be cheaper to live in a condo on the beach in Florida.
4. Rushing Into Another Purchase
The experts agreed that a common downsizing mistake is rushing into a purchase after the retiree has sold their primary residence.
Sajovits said that many people have lived in their homes for 20 or 30 years, and forget how set in their ways they might be. Retirees may think they want to live on the beach, but they may discover they rushed into the purchase because they’re not ready for the summer heatwaves or for being so far from family.
Another issue with rushing into another purchase is that you could get stuck with a property that you don’t feel comfortable in as you miss your old residence. Try renting for a bit first to test the waters of your new neighborhood.
5. New Home May Need Maintenance
You have to think about how much maintenance your new property will need, because the costs of customizing it to your liking could add up. As a retiree, you want to be comfortable in your new living quarters, which means you may spend a significant amount on repairs and upgrades.
The experts also said that you likely maintained your home well for many decades, but the new property you move to could require maintenance or repairs you didn’t anticipate. Your downsizing could lead to weekend projects and hefty repairs that eat into your savings.
"A smaller house is not automatically a smaller bill," Rodin said. "People move for less square footage and forget they are also buying a new tax base, a new premium, and somebody else's deferred maintenance."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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