How Downsizing Can Save Your Retirement

The kids are long gone, you're sick of mowing the lawn, and you're tired of paying to heat and cool a nearly empty house. Why not downsize?

You'd have company. Among retirees who move, half swap for smaller digs, found a new study by Merrill Lynch and Age Wave. Most of the downsizers say cost cutting was the chief reason. Booming real estate prices have made the payoff even bigger, says Steve Sass, program director for the Center for Retirement Research: Home equity, for many baby boomers, far exceeds the value of their 401(k) or IRA. "It's where their wealth is," says Sass.

With downsizing, however, come hard decisions. Stay nearby or leave town? Condo or single-family home? Making the wrong move will cost you—and maybe you'll have to relocate once again. "I've seen people who want to move to places where the taxes cost more than for the house they are moving from," says Ray Mignone, a financial planner in Queens, N.Y. "They just didn't do enough due diligence."

To avoid a similar mishap, tackle the four questions below.

Here or there? Exchange your house in an upscale suburb of D.C. for, say, a cottage in Chattanooga, and you'll almost certainly pad your retirement fund. But people often overestimate their savings, warns New York City financial planner Gary Schatsky. The transition itself, including outlays for paying your selling broker and moving all your stuff, will cost you roughly 10% of the price of your old place, figures Sass. And then there are the unexpected expenses.

When Jan Cullinane, author of The Single Woman's Guide to Retirement, moved with her husband from the Midwest to Florida in 2007, their tax bill shrank—but their home insurance premiums grew. Another surprise: "With the change in climate, we realized we needed entirely new furniture," she says.

Want to stay near your current home? You'll reap minor rewards by losing a bedroom or two. For bigger savings, see if moving a few more miles away would put you over the line into an area with lower property taxes, or if you can move close enough to a walkable downtown to forgo at least one of your cars.

Condo or single-family home? In general, condos are cheaper than single-family homes, and you won't have to clean gutters or replace the boiler. You'll pay, though, for shared maintenance. So ask current owners about their monthly costs; homeowners association fees, which may cover items such as yard work and water supply, are often higher than buyers expect, says Huntington, N.Y., certified financial planner Cary Carbonaro. And be sure you're ready to live near other people and by their rules: HOAs can have restrictions on everything from dog breeds to overnight guests.

Buy or rent? If you've owned your home for a long time and have a small mortgage, or none at all, you might assume that buying is better, chiefly for a sense of permanence. "In retirement planning we try to reduce variables, and rent is a major variable," says Charleston, S.C., financial planner Tim Maurer.

But sometimes renting makes more sense—for example, if people you want to stay close to (such as your kids) might themselves move in a few years. "If you're not absolutely sure you want to be somewhere for more than five years, don't buy," says Chicago financial planner Don Duncan.

Have a ton of home equity but little in retirement savings? You might add the proceeds of a home sale to your portfolio instead of plowing it into a new home. Over the long haul, a balanced portfolio is likely to appreciate faster than residential real estate, says Duncan. Depending on where you're looking to live, renting may also be cheaper than buying a comparable home. (To decide which is right for you, try this rent or buy calculator.)

Now or later? Some retirees are reluctant to leave the house where they raised their kids or want to postpone the hassles of moving. But if you're going to downsize, says Sass, the earlier the better. You're likely better equipped for the physical and emotional stress of a move in your sixties than in your eighties.

That stress should also push you to ensure that your new home has features allowing you to age in place: wide hallways, a step-in shower, and rooms all on one level so you don't have to negotiate stairs. You also need to make sure the local community has public transport and good medical care. "Given the pain of moving," says Sass, "your goal should be to avoid having to do it again."

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