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Beware the downside of downsizing in retirement

Consider the financial and emotional costs—and the benefits

Published: April 2014

As much as people talk about simplifying their lives by downsizing in retirement, most don't choose it. When Consumer Reports National Research Center recently asked retired Consumer Reports subscribers ages 55 to 75 about moves they'd made in retirement, only 10 percent said that they'd downsized.

That figure doesn't include the experience of older retirees, who may end up moving to a smaller, more manageable space or moving in with family. But the suvey finding rings true for Ed Kohlhepp, a certified financial planner in Doylestown, Pa. "Clients don't necessarily want to go from 2,400 to 1,500 square feet, or from three bedrooms to one," he said.

Rather, many want to keep conveniences they're used to and even add new ones. Kohlhepp moved in his early 60s to a house about 10 miles away that's a bit larger than his previous one. In their new community, he and his wife pay a monthly fee for all outside maintenance. "It was almost a parallel move financially, but we get someone else doing the outdoor chores, security, and a master bedroom on the first floor," he said.

Want to read more on retirement? Visit the Consumer Reports Retirement Guide.

If you've owned your home for decades, you may well gain from selling it, despite the recent downturn in many real estate markets. But too large a gain can subject you to significant taxes. Couples and unmarried widows or widowers must pay federal capital gains tax on home sale profits that exceed an exclusion of $500,000. (For single and divorced people, the exclusion is $250,000.) If your marginal income tax rate is 15 percent or less in the year you sell, you may not owe any tax on the profit. But high earners face a federal long-term capital gains rate of 20 percent plus a new, 3.8 percent net investment income tax, and any state capital gains taxes.

Even without a tax bill, a move generates significant expenses. Major costs include fees for real estate brokers and lawyers, and movers' expenses. Home expenses in your new digs may be higher—or at least no less costly. Kohlhepp says his condo's initial maintenance fee of $240 per month was about equal to what he used to pay on average for shoveling, landscaping, and other outdoor work. But his property taxes—for a larger, newer space—were higher.

A home sale could affect other aspects of your financial life. If, for instance, Veterans Affairs provides you with health care benefits based on your income, home-sale profits that improve your financial status could cause an end to that benefit, says Mitch Adel, an elder law specialist and senior partner at Cooper, Adel & Associates in Centerburg, Ohio. Veterans receiving benefits are required to report to the VA any changes in net worth and growth in household income, among other bottom-line developments. According to the VA, household income of $31,443 or more could disqualify certain beneficiaries.

Similarly, downsizing can create nightmares for seniors receiving Medicaid assistance for in-home care, Adel says. Your home is exempt from Medicaid’s asset-based eligibility formula, but a home-sale profit that raises your assets above a given threshold could negate those benefits temporarily. You would have to spend down that profit on out-of-pocket medical expenses before Medicaid would resume your benefit, Adel says.

And uprooting has emotional costs, even when seniors are moving nearby. You’ll need to familiarize yourself with a new routine and neighbors, and perhaps new places to worship and shop. That may in part explain why only 35 percent of respondents in our survey said they’d moved since retiring.

 


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