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November 4, 2020

5 budget changes to expect when you downsize in retirement

Downsizing homes is one way to cut expenses and grow your nest egg in retirement. But downsizing can lead to some unexpected budget changes.

With kids out of the nest, and the need to grow a nest egg, many retirees consider downsizing their home. But before downsizing, retirees should consider whether it will have the intended effect on their budget. These are the five ways your budget will change when you downsize in retirement.

Modifications in housing expenses

When you downsize, your housing costs will change. Downsizing may cut your monthly outflows down, but they are unlikely to fall to zero. Before a big move, you’ll want to update these numbers in the Retirement Budget Calculator.

  • Housing payment. After selling, you may opt to rent for a few years, or you may take on a new mortgage. Be sure to factor that new payment into your budget to see whether your nest egg can support it.
  • Utility bills. In most cases, a smaller house means smaller utility bills. While the savings may seem small, they can add up to hundreds of dollars annually. The savings can be even greater in places where climate control drives up energy costs.
  • Maintenance costs. Buying a house means paying to maintain it. A smaller house or a condo should mean lower maintenance costs, but that won’t always be the case. When buying an older house, be sure to take into account when you’ll need to do bigger repairs.
  • HOA dues and assessments. If you move to an active retirement community, a condo, or another neighborhood with an HOA, you’ll be taking on HOA dues and assessments. These dues can go up over time, so you’ll need to calculate inflation into your budget.

Updating your numbers will help you estimate your true spending during retirement. The Retirement Budget Calculator depends on accurate spending estimates to answer questions. When you know your spending, you can start to answer when you can retire or whether you’re likely to outlive your money during retirement.

Changes to your tax bill

One surprising change to your budget involves taxes. Whether you’re moving across the street, or across the country your taxes are likely to change. If you plan to own a house, you’ll need to check property tax rates in your new jurisdiction. This is especially important if you’re moving from a low property tax state to a high tax state (like Florida or Texas).

Retirees changing states will also need to consider income tax rates. While incomes tend to be lower during retirement, most retirees will pay some amount of taxes. These taxes should be baked into the budget.

Transformations of long term care costs

Downsizing can have an unexpected effect on long term care costs too. Medicare may cover eligible costs associated with home health aides or in home skilled nursing assistance. It does not cover the cost of long term care such as nursing home care. Choosing a home base that allows you to age in place is important for downsizing retirees.

An appropriate layout can reduce the likelihood that you’ll need expensive long term care in the future. For example, a floor plan with fewer stairways can prove to be more valuable in the long run, even if it costs more up front. Retirees who aggressively downsize or choose a layout that’s not suitable for the long run risk needing to move into assisted care.

Even if you don’t downsize, make sure your retirement budget has some room for future renovations. Modifications like an entry ramp or adding a walk in tub, can make a house livable for longer. You can’t know the exact modifications you’ll want in the future, but you can build in a few “one time” expenses into The Retirement Budget Calculator. Planning for these costs will help ensure the funds to modify your house when you need to.

Freedom to spend elsewhere

One of the primary benefits of downsizing is the freedom to spend money elsewhere. Selling a large home could add hundreds of thousands of dollars to your nest egg. It can also shrink your housing costs.

For some retirees, downsizing may be the one move that will “make the budget work.” Retirees with larger nest eggs, may find that they have adequate income to splurge in other categories. The financial benchmarks can help you figure out whether you’re in the first camp or the second.

Shifts in lifestyle costs

Ideally, your new home cut down your housing expenses. It will also be close to your grandkids, your church or a similar organization, an international airport, and your favorite amenities. However, downsizing may involve making tough trade-offs.

If you move away from family, you may end up spending more on airline tickets to visit the grandkids. Retirees who choose a rural location, may spend more money on vehicles to get around town.

Your home base also affects your general quality of life. Will your new house allow you to maintain involvement with your church or a volunteer engagement? Will you enjoy the amenities near your new home? People who love the cultural amenities of a big city may not take advantage of living near a ski resort. Those who love hunting may not love beach living.

When you don’t live in a place you love, you may spend more on travel, experiences, and day to day living to “escape” from your new home. The need to escape can increase your spending and decrease your quality of life.

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