The Power (and Perils) of Downsizing for Retirement

A recent survey from the Consumer Reports National Research Center found that only 10 percent of Consumer Report subscribers between the ages of 55 and 75 downsized for retirement. This lack of downsizing might have something to do with perspective and optimism, as indicated by the fact that 89% of respondents said they would prefer to stay in their current home, even though they agreed that a smaller home would be preferable to a nursing home or assisted living facility. Choosing to downsize early in retirement may not seem like an ideal situation, but it could save you time and money in the long run.

According to the U.S. Department of Health and Human Services, 70% of people age 65 and older can expect to use some form of long-term care during their lives. The risk becomes even higher as you age, and it is also obviously affected by certain health conditions and disabilities.

What If You Own Your Home? Does Downsizing Still Make Sense Logistically and Economically?

Intuition might suggest that owning your home—especially if you no longer need to make any mortgage payments or at least any significant payments—would make staying put a superior economic option to downsizing.

However, don’t be afraid to challenge intuitive assumptions like these about downsizing and about planning your financial future in general. For instance, even if the real estate market isn’t totally in your favor, you could still gain from selling your home. Do keep in mind, though, that especially large gains from such a sale could subject you to significant taxes.

For example, couples and unmarried widows or widowers who earn home sale profits that exceed $500,000 must pay federal capital gain tax. Single and divorced individuals are capped at $250,000.

High-earners, meanwhile, could be hit with a federal long-term capital gains rate of 20%, plus 3.8% net investment income tax, along with any state capital gains taxes. That said, if your income tax rate is 15% or lower in the year of the sale, you may not have to pay any tax on the profit. The moral is that you really need to crunch the numbers and to consider your downsizing options (and homeownership strategize) in a broader, long term context.

Do you have questions about how downsizing for retirement will impact your financial situation? Are you generally scattered when it comes to planning out the next stage of your life and ensuring not just your comfort and enjoyment but also your legacy for the next generation? Contact the estate planning attorneys at ILP for a free consultation at (800) 827-7784. We can help you develop creative, appealing options.