You're nearing retirement, your children have left the nest, and you're tired of maintaining your big yard. Suddenly, the idea of downsizing makes a lot of sense.
But such a life-changing move inevitably creates stress. You face tough choices as you go from having more space to living with less. Do you sell a piece of furniture that is a family heirloom because it won't fit in a smaller home? Will a smaller home still have the extra bedroom or large dining room you'll want when your kids and grandchildren visit? How will you spend or invest proceeds from the sale of your home?
Step 1: The choices
Start planning early, says Sarah Munson, Senior Wealth Planner with Wells Fargo Private Bank. Talk honestly with your spouse about your vision for your retirement years, and set your financial goals with the help of a wealth planner.
"When you downsize, you inevitably have to consider what you'd be willing to give up," Munson says. "You have to determine where you want to live and then weigh your needs versus your want-to-haves. Having a plan in place can eliminate a lot of anxiety."
A desire for cost-savings — whether to make sure retirement income lasts or to leave a larger legacy to beneficiaries — often is a main reason people choose to downsize. As an example, one of Munson's clients owned three large homes where he divided his time. When he sold one of the houses and bought a townhouse in the same location, he reduced his property taxes by more than half. And his new yard was small, which allowed him to maintain it himself instead of paying for lawn care services, she says.
Another key consideration when thinking about downsizing is your health as you age. A single-level home may suit your lifestyle better than having to climb stairs every day.
"Location is probably the No. 1 factor people think about when they are downsizing." — Sarah Munson, Senior Wealth Planner, Wells Fargo Private Bank
Location is also important. Some people buy a smaller home in the town where they already live because they want to maintain friendships, while others move closer to children and grandchildren or relocate to states with lower estate taxes.
"Location is probably the No. 1 factor people think about when they are downsizing," Munson says. "But some want to downsize to remove some of those home expenses so they can spend more on other retirement goals, like travel or early retirement. Every situation is varied."
Step 2: The move
Once you've made the decision and picked out your new home, the next step is actually moving. Again, the process may seem more difficult than previous location changes because instead of just packing everything up and sending it over to the new home, you may need to make some tough decisions about which of your treasures and other belongings actually will go with you to your new residence.
Munson recommends starting with a complete inventory of your possessions. Then, keeping in mind exactly how much square footage you'll have in each room of your new home, you can decide which items fit your new home and how to divest items that don't make the cut.
Planning early may allow you to pare down possessions gradually in advance of downsizing, she says. Some people rely on moving sales, while others gift possessions to children or to charities (with tax deductions as one potential benefit of the latter). There are other options, too.
"One couple sold their home furnished, giving them extra capital and the chance to start fresh with new furniture," she says. "One woman who downsized is now giving away family heirlooms as holiday gifts."
Once you know how much you'll net on your home sale, you can update and finalize your wealth plan, deciding how the proceeds fit into your strategy. Don't forget there will still be routine home maintenance and unexpected expenses associated with your new, downsized home, so set aside money to be prepared for those costs, Munson says.