Why Downsizing Might Not Save Your Retirement

A big decision as we get older is whether to downsize the family home.  Typically people downsize when they no longer need the larger space, or are not willing to deal with the financial and physical maintenance required of a bigger home.

Financial experts suggest that the large tax-exempt equity on the sale of their former residence can considerably boost a couple’s retirement nest egg.

Related: Should you sell the family home?

It might, but it doesn’t always work that way.

It depends.  If you move from:

  • A huge “McMansion” to a smaller condo.
  • A large, expensive city to a smaller town – say, Vancouver to Moncton.
  • A major city to a less expensive region.
  • Canada to become an expat in a less costly area such as Portugal or Belize.
  • Your family home and rent a new home instead of buying.

The media often features homes in the high hundred thousands to low million dollar ranges that boomers supposedly own.  Obviously there are some people in this bracket, but the people I know live in more modest homes in the $300,000 – $500,000 range.

There’s not much of a nest egg left after all expenses are paid.

Related: 4 hidden costs of buying and selling a home

In my opinion, the most likely scenarios for people considering downsizing are either:

  1. Making a lateral move, or
  2. Paying off debt.

Lateral Move

There may be little difference between your sale price and new purchase price.  Sometimes, the new home will cost you more than the one you sold.  Extra luxury can compensate for less space.

This was definitely the case for us.  We viewed many types of properties and briefly considered some older houses that were less expensive but would need extensive renovations to modernize.

RelatedDo home renovations pay off?

We had sold our 35 year-old fixer-upper – and, knowing us – we were not prepared to take the time and extra expense to renovate.  We instead purchased a slightly more expensive 5 year-old property that already has nice upgrades and there is very little I would change.

Paying off debt

People who consider retiring while still carrying a mortgage on their property – or other large debt – can wipe it out with the sales proceeds and live in a smaller home, debt-free.  Obviously this will free up cash for monthly expenses and, perhaps, a more luxurious lifestyle.

Set realistic expectations

We originally didn’t think we could afford to move until we called a realtor to do an evaluation of our home – as is.  We were pleasantly surprised at her suggested listing price and then we did our calculations.  Once we made our decision, events happened very quickly and costs rose just as fast.

The difference between the sale and our new purchase was approximately $100,000.  From this amount came the following (rounded off) expenses:

Real Estate commission $18,000
Legal fees $2,000
Land transfer tax (percentage of price in BC, rather than fixed $375 in AB) $4,000
Trip to Kelowna to view properties – flight, hotel, meals, car rental $2,500
Moving company $3,000
“Junk” removal for items we couldn’t sell or take with us $1,000
New “small scale” furniture to fit into our “small scale” apartment $5,000 – $10,000
Misc. expenses: packing supplies, interest on bridge financing, meals out $1,000
Line of credit paid in full $30,000

So, we’re left with a little under $30,000.  Not bad, but it will be used as more of a cushion than a nest egg.

Final thoughts

Many people make a mistake thinking they can sell their home and move into a cute little condo or sea-side cottage with extra hundreds of thousands of dollars to fund their retirement.  It’s possible, but make sure you have realistic expectations and determine how much you will actually net from the sale.

Related: How much house can I afford?

Moving to a smaller, cheaper place can free up home equity for living expenses and reduce annual housing costs.  But, often a new place can cost more than the one sold.

You may save on utilities but pay costly condo fees.  A small town may make you feel isolated from family and friends.  It may not have the amenities you need.  You might not want to drive 30 minutes to get a litre of milk, or travel to the nearest town to see a doctor.

Whether you will realize a large net gain, reduce your monthly living expenses, or have a more desirable lifestyle, downsizing is a big decision that takes a lot of consideration.

Make sure you make the right move.

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  1. Dan @ Our Big Fat Wallet on July 16, 2014 at 12:35 pm

    Downsizing or not, I think many people underestimate the true costs of moving – which you’ve done a good job of highlighting above. It all adds up rather fast, and in some cases can make it not worth moving at all.

  2. Rosemary on July 17, 2014 at 6:08 am

    Another option is to look at your home to see if it can get divided into a principal home and a rental unit. The rental income could be used to pay for help in maintaining the principal home and covering utility costs. You downsize in your own home.

  3. Robert St. Cyr on July 17, 2014 at 7:31 am

    Good article. Staying put and paying someone to do the maintenance I could often be a better choice. Condos are ridiculous. If I sold my current house and bought the condo I could afford with the left over I would have the same property tax payments plus condo fees for the much smaller space with no yard. When the time comes we’ll sell and then rent.

  4. Anne @ Money Propeller on July 17, 2014 at 9:59 am

    This is a fantastic summary. So many people get blinded by the “big ticket list price” and there are so, so many other expenses, like the furniture that you’ve mentioned.

  5. Robert on July 17, 2014 at 1:31 pm

    Marie I am glad you are doing all of this before me and sharing your findings! Once one has kids and career in the rear view mirror it is easy to feel you are in the wrong place and that that place is in the wrong size.

    For me a move now is more about what situation is logical for how I will spend retirement than it is my excess space. When I figure that out I can proceed. Although living in Toronto it is tempting to grab the absurd payout and run before the next correction.

  6. Phil on July 17, 2014 at 2:30 pm

    I think most people have a hard time downsizing as they think it goes against keeping up with the joneses

  7. Brett on July 17, 2017 at 8:22 am

    I think that the article overlooks one option…renting. We downsized a large home into an 8x8x16 storage container. We travelled for seven months. Came home and intended to buy a condo. The math did not work…it was much better financially to rent. We rented a condo for four years. Our invested home equity, after tax, paid for our rent and for a great portion of our two extended overseas trips each year.

    We eventually bought when our housing market collapsed. But, we were very happy renting. It was the first time in35 years that we did not have to bother with home repairs or upkeep. Renting can not only be a good option for some, it can also be financially advantageous when all the costs and benefits are factored into the equation.

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