7 Money Mistakes to Avoid When Downsizing in Retirement

by David@MoneyNing.com · 4 comments

I live in California, and house prices are insanely high here. That’s part of the reason why many people downsize their homes when they retire.

In fact, we bought our house recently from a family who did just that. The husband was retiring and with two kids going to college, the previously one income family decided to sell their home and move to San Diego, where the cost of living is slightly lower and the weather is even more pleasant than where we are currently.

Their decision could turn out to be a home run financially. First, they will get a big lump sum that can be used to generate passive income. Second, their property tax bill will be at least half, if not become a third of what it was. Third, they’ll also lower their other monthly expenses like their water bill or even spend less eating out.

Why Did You Say Could?

Yes, the potential for this to be a home run is there, but many people fail to keep the savings from a downsize because there are many mistakes people make that end up reducing their financial benefit significantly. Are you thinking of downsizing? Here are seven mistakes you should avoid making.

1. Overestimating how much proceeds you’ll get for your home sale. Remember that it’s not how much you list your house for but what the accepted offer will be that will determine how much you ultimately get for your house.

Many people also forget to include sales commissions, the money needed to fix everything, cleaning, and staging the home before the house is ready to be sold. As these costs can be as much as 7% of the cost of the home, it can make a big difference.

2. Overpaying on the new smaller home once you downsize. Once you are used to what’s bigger and more luxurious, it’s very hard to go back. That’s why it’s extremely common for people downsizing to end up overpaying for the house they move into.

In order to do this right, you absolutely need a solid plan. Be as specific as possible. Where are you going to relocate to? Make a realistic budget of what a new home will be worth before you decide to sell your current pad.

3. Not factoring in the costs of moving. Movers can be expensive, especially if you hire the ones who’ll pack everything in your old home too.

And since you really don’t know how long it’ll take to sell your house, you’ll either need to shoulder the cost of two houses for a while if you only want to move once or you’ll need to rent an apartment, doubling your moving costs.

Another common cost for people downsizing is the need for a storage unit. For some, it’s a temporary place to store everything as you sell and move to a new place. For others, it’s semi-permanent since there is stuff they don’t want to sell but won’t have room in the new house. Either way, storage unit costs should be factored into the equation.

If you are moving farther away from your family, you will also be paying more for family visits. Car rides are okay, but what if you are moving to a no sales tax state? No one is really flying these days, but there will come a day when you’ll want to pay for a plane ticket to see the grandkids.

4. Not accounting for new costs with the new place. You’ll likely need some new furniture because chances are good that some of the big furniture won’t fit nicely in the new smaller place. There may be other furniture, like an older mattress, that you would like to replace.

Utilities and HOA costs may also be higher. You’ll at least need to pay for establishing new services (and maybe to shut off old services too).

The new place may also need some TLCs. When I moved into my house, I had to buy a few outdoor lights because the inspector didn’t check the outdoor lighting and they weren’t working. We also had to get someone to fix the fire pit that didn’t seem to work. Another common expense new homeowners pay for is a new fresh coat of paint.

Think about this for a second. Have you heard of anybody who didn’t pay a dime extra after they move into a new home to fix it up? What are the chances that you’ll be the first one to do it?

5. Not thinking through how taxes will affect everything. Most people won’t have to pay capital gains taxes when they sell their home, but don’t just assume you can sell your house without paying any taxes. Uncle Sam always wants its share!

6. Not having a plan with the money once it hits the bank account. This could be a biggie. A portion of the sales proceeds will go to pay off the mortgage, but all the equity you’ve built through the years will hit your bank account all at once. For most people, the account balance will be higher than it’s ever been in their life.

Do you want to put it into long term investments? If so, then how much will you put into which investment and in which accounts? You need to be very specific about what you plan to do as soon as the money is available. It’s too easy to squander some of the money if you don’t have a plan. Don’t make that mistake.

7. Not discussing your plans with your children. I highly recommend anyone who has grown children to speak with them before any plans are made. You may have kids who want to stay with you instead of seeing you move to a whole other state. Your kids may even want to offer to buy out your house, the place they grew up in. You just never know.

If anything, your children will be a sounding board for your decision and help you make the most informed decision. This is an incredible opportunity to speak to your children about money, whether you need help or you are in a position to help them. Don’t let it go to waste.

I sincerely hope the family we bought the house from does everything right, because boy, the financial rewards of downsizing can make a significant difference in their retirement.

As for you, I know you will do just fine now because you’ll think things through carefully and make a plan, anticipating and avoiding all the potential mistakes people make.

Always let me know if you want someone to talk things over!

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  • Jane says:

    Don’t assume your property taxes will go down! Especially in California, if you owned your previous home for a while and have a lot of appreciation, you might end up purchasing a smaller home that has a larger tax basis.

    • David @ MoneyNing.com says:

      That’s a great point Jane! I lived in Southern California and I totally forgot about Prop 13 that limits property tax increases to a ceiling of 2% a year.

      That could have been #8 on the list. Thanks for the reminder!

  • Lisa Va Gemert says:

    I think it’s possible you mean “cost of living” instead of “standard of living” when referring to San Diego. It seems unlikely you intended to insult the lovely San Diego!

    • David @ MoneyNing.com says:

      You’re right Lisa. I do mean cost of living.

      I should be a bit more careful with my choice of words. I do mean how everything costs a bit less in San Diego. If you count the weather, you could argue that the standard of living is actually better in San Diego than in Orange County! 🙂

      Are you living there? You are so close to where I am!

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