The Secret to Stress-Free Cost Savings in Retirement

04.17.2016 Secret Retirement Costs Home Header ImageIf your retirement is just around the corner, you might be concerned about how to manage your costs while still enjoying the lifestyle you envisioned for this new chapter in your life.

And who can blame you? In this day and age, retirement is far from simple. Even if you’ve done everything right — saved enough, diversified your income sources, taken control of your budget, and prepared a retirement income strategy — you might still be worried.

To help you manage the risks, consider downsizing your home. Not only could moving to a smaller house help you add to your retirement savings, the sheer cost of homeownership is likely to fall as well — leaving you with more money to work with each month and lowering your stress levels in the process.

Here’s what you need to know.

Unlocking the value of your home

Assuming you move to a cheaper home and have equity in your existing property, you may get to enjoy a windfall. Depending on the numbers involved in your transaction, it could be tax free! The amount involved — and the importance of extra liquidity to you — will vary depending on your personal financial situation. However, there could be an immediate financial benefit to downsizing your home.

That being said, not everyone wants to downsize in terms of home value. What if you want a smaller house, but in a more expensive area? Maybe you’ve been dreaming of going back to the city, or perhaps you want to take this opportunity to get closer to the beach or golf course.

In this case, there are still potential advantages to going smaller.

Consider all the recurring costs of homeownership. Aside from property taxes and maintenance, you  also likely pay for insurance, heating and cooling, cleaning, gardening, utilities, and more.

A smaller home can save you money on a number of fronts. For example, you might see your insurance premiums fall. Without a big yard or extra rooms to heat and cool, you could eliminate some unnecessary spending. With a condo, your costs could fall even further — after all, in an apartment building it’s someone else’s problem if the roof leaks or the pipes get backed up.

As a word of caution, however, be aware that you might encounter new fees and charges depending on what kind of home you buy and where. For example, certain communities charge association fees, or you might become subject to local charges and taxes that you weren’t paying before.

In other words, when shopping around it’s important to pay attention to the details. It doesn’t make much sense to go through the process of downsizing only to find that your total costs haven’t fallen!

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Don’t forget to check for beneficial tax rules

Depending on where you live, you may also enjoy some tax advantages as a downsizing empty nester.

For example, if you live in California and are over age 55 (or if you’re any age and permanently disabled), you can get a tax break when you sell your home and replace it with one that costs the same or less.1

This rule, known as Proposition 60/90, allows for a one-time transfer of the assessed value of your primary residence for property tax purposes. It’s especially advantageous if you’ve been in your home for a long time and its value has risen.

Consider this: if you paid $200,000 for your home many years ago and it’s now worth $600,000, you’re still paying taxes based on the original purchase price, adjusted for inflation or major improvements. Now, let’s say you sell your home for its full value of $600,000 and buy a new one for $450,000.

Normally, you’d be subject to property taxes based on the market value of the new home. In California, that amounts to 1% of the purchase price, or $4,500 per year. Under Proposition 60/90, however, you can transfer your previous tax burden instead. Assuming it hadn’t risen much since you purchased the home, that would keep your tax bill closer to $2,000 per year.

Proposition 60/90 gives you a chance to save you thousands of dollars every year. Keep in mind that this is a one-time deal and comes with restrictions and additional benefits. To find out more, take a look at the California Board of Equalization website or speak to a qualified advisor.

If you don’t live in California, check out the rules in your state to see if there are any tax advantages to downsizing. You might be surprised by what you find!

Prepare for the mortgage process

If you’ll be taking out a mortgage to finance your new home, it’s important to be prepared for the process.

While lenders are prohibited from discriminating against retirees or pre-retirees on the basis of age, your income and asset levels will be scrutinized.2 A higher credit score obviously helps reduce the cost of borrowing, as will having a lot of equity in your existing home to put towards your new one.

You’ll need to demonstrate that you have the creditworthiness and ability to manage payments on your new home. The fact that you’re downsizing should hopefully make this process easier, but keep in mind that it can be more difficult depending on where you are in your retirement journey — especially because the best rates may only be available if you meet certain rules and guidelines.

Ultimately, when it comes to how much house you should buy and the kind of mortgage you should take, the right choice is highly dependent on your unique financial situation and personal risk profile. Be sure to understand the limits of what you’re willing and able to borrow and how that aligns with your goals for retirement.

Home sweet smaller home

Done right, downsizing can be an exciting start to a new chapter in your life — one that allows you to spend more time and money on what matters most to you. Moving is a major undertaking, of course, but it’s one that can simplify both your day-to-day life and your overall finances.

Just remember to keep an eye out for the conveniences that you’ll come to appreciate as an older retiree: for example, a ground-level unit or access to an elevator, wider hallways to accommodate a wheelchair, or a bathroom that allows for easy access. You never know when a mobility issue could strike, and the last thing you want is for your wonderful new home to become an unwelcome obstacle course.

Here’s to enjoying a happy, comfortable, and convenient retirement home.

Act Today!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.

Secret Retirement Costs Home Infographic

1For more information, please see this Q&A from the California Board of Equalization.

2Fannie Mae. B3-3.1-01 General Income Information.


The information presented this article is general in nature and not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.