Downsizing in retirement: Expenses they didn’t expect

On the way to spending less, people often have to shell out more, at least temporarily — especially when selling a home. Here’s what to consider.

  • By Susan B. Garland,
  • The New York Times News Service
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Louise Angel Kiss and her husband, Charles, lived in their four-bedroom, split-level house in the Seattle suburb of Bellevue, Wash., for 40 years. Their two daughters had moved away long ago, and the couple decided they’d had enough of the stairs and the hassles and costs of upkeep. Like many older homeowners, they decided to downsize.

In 2018, the couple chose a two-bedroom unit at a continuing care retirement community in nearby Issaquah, which would provide assisted living and nursing care if they needed it.

“We had our bubble of security and safety,” said Mrs. Kiss, 81, a travel agent. Mr. Kiss, 86, sold a dry cleaning business years ago.

During the process, however, the couple discovered what many prospective downsizers do: more expenses and headaches than they’d anticipated.

Despite the hot Seattle-area housing market, their house did not sell until they spent $20,000 to remove the popcorn ceilings and renovate the kitchen. The delay in getting money from the sale forced them to take out a bridge loan to pay the community’s hefty entrance fee on their new apartment.

“We were not happy we had to go through all that,” Mrs. Kiss said. “If I were advising someone who is downsizing — make sure you have all your ducks in a row and are prepared for any contingencies.”

Like the Kisses, Dale and Marian Boyd were in for a surprise when they put their four-bedroom ranch house in Newnan, Ga., up for sale a year ago. The couple were asking top dollar and figured they would have time to look for a new place before their house sold. It sold in one day.

Two weeks later, they placed much of their furniture in storage and moved to a rental house, where they lived for nine months, at $2,000 a month. In the meantime, they signed a contract for a house that had not yet been built. They moved into it in July.

“We got caught with our pants down,” said Mr. Boyd, 75, who owns a plumbing contracting business. “We had not decided where we wanted to live yet.”

Get real on housing costs

One way to avoid such surprises is to thoroughly check out the housing market before putting out the “For Sale” sign. Older homeowners should consult with several real estate agents and appraisers to get a realistic picture of what their house might sell for and what smaller homes might cost.

This is particularly important to do right now. Though local markets differ, empty nesters hoping to make a killing on the sale of the family home may be disappointed. Rising mortgage rates and a declining stock market are making it more difficult for younger home seekers with families to afford the down payment and monthly payments for a large, pricey home, said Kari Haas, a real estate broker in Bellevue who helped the Kisses sell their house.

Ms. Haas said many older homeowners had delayed downsizing during the worst of the pandemic, and homes were now lingering on the market. Also, she said, sale prices have dropped since earlier this year, when mortgage rates began to rise. At the same time, she said, older buyers are competing with younger buyers for less expensive, smaller homes. “There are not a lot of smaller ramblers and single-level townhouses to go to,” Ms. Haas said.

In addition to determining sales prices, homeowners could figure out possible savings by comparing the expenses expected at a new place with those at their current place, experts say.

One often overlooked line item for sellers: closing costs, which could reach between 8 percent and 10 percent of the sales price, according to the real estate website Zillow. Those typically include a 6 percent real estate agent commission, though sellers could try to negotiate a reduction to that charge. Moving costs and home staging, such as new paint, floors or remodeling, will also eat into profits.

Mike Robinson, a real estate agent in Peachtree City, Ga., outside Atlanta, said home buyers who planned to move into condominiums or independent homes in planned 55-plus retirement communities also needed to budget for monthly fees. These homeowners association fees pay for security, grounds maintenance and amenities such as pools and fitness rooms. They are generally not tax-deductible and can range from $100 to more than $1,000 a month.

Buyers should be sure to ask what the fees cover. In some communities, for instance, they do not cover lawn care or parking.

Mr. Robinson, who is Mr. Boyd’s brother-in-law and helped with the sale of his house, also said retirees should take a close look at a potential destination’s taxes. States vary on how they tax retirement income, and property taxes differ by locality. Even if your new house is smaller than your old one, your property taxes may not drop, depending on the new home’s value and its tax rate.

“If you’re turning 65 in our area, you could save a considerable amount on property taxes,” said Mr. Robinson, referring to his county’s income-based partial tax exemption for seniors.

If your house has appreciated significantly over the years, capital gains taxes could crimp cash proceeds from a sale. Homeowners who have owned and lived in their home for at least two of the five years before the sale could owe capital gains tax on any profit above $250,000 for singles and $500,000 for joint filers. Widows and widowers may be eligible for the $500,000 exclusion if they sell within two years of a spouse’s death and have not remarried at the time of the sale.

The long-term capital gains tax is generally zero percent, 15 percent or 20 percent, depending on one’s income during the year of the sale.

Samantha Kennedy, a certified financial planner in Bellevue, said she had advised some clients who owned highly appreciated homes to hold off on a sale until the year of their retirement, when their income likely dropped. “If your income is lower, you will have potentially lower capital gains tax,” she said.

Ms. Kennedy said homeowners who had experienced large home appreciation should gather their records of major improvements over the years, such as remodeling or a new roof. Sellers can reduce the taxable gain by adding those costs to the original purchase price of the house.

Mrs. Kiss said she and her husband had paid capital gains tax on the sale of their home. On top of that, the money they earned from the sale beyond $500,000 drove up their income-related monthly Medicare premiums for the year. And because their premiums are deducted from their Social Security payments, they received smaller monthly benefits. “That really hurt,” she said.

Improving cash flow

Many downsizers expect to improve their retirement income stream if their new home costs less than what their old house sells for. Lower utility costs, insurance and property taxes — as well as investment returns on the proceeds — can also improve the bottom line. Though a certified financial planner can help run the numbers, you can get some idea of the benefits by plugging your data into the move-or-stay-put calculator of the Center for Retirement Research at Boston College.

You can use the same calculator if you are thinking of renting rather than buying after selling your house.

“If you don’t want any home maintenance, renting may make sense,” Ms. Kennedy said. And because closing costs can be steep, renting also may be a good option for downsizers who expect to move again within several years, she said.

Despite their unexpected costs, Louise and Charles Kiss improved their cash flow after they sold their house. With the proceeds of the house sale, the couple were able to repay the bridge loan for the upfront entrance fee at a retirement community called Timber Ridge at Talus and invest the balance, about $250,000, in U.S. Treasury bonds. They cover the monthly fee and other expenses with interest on those bonds, retirement savings, Social Security benefits, Mrs. Kiss’s income as a travel agent and a pension she receives as a retired nurse for the state medical system.

The couple have few additional expenses beyond groceries, the occasional cruise and dinners out with friends. The community’s monthly fee covers utilities, maintenance, weekly apartment cleaning and many meals and amenities. They have gone from two cars to one, saving on insurance, gas and repairs. If the spouses need transportation at the same time, the retirement community provides a free ride service.

Beyond finances

For the Kisses and the Boyds, the lifestyle their new homes would provide was as important as any financial consideration.

Retirees who are looking to shrink their square footage should carefully consider the kind of life they want to lead, said Andrew Carle, the lead instructor of a graduate curriculum in senior housing administration at Georgetown University.

“Plan it the way you plan a lot of things in life,” Mr. Carle said. “Do you want to be near the grandkids? Do you like the neighborhood you’re in? What are your interests and hobbies?” He said retirees should also consider their health needs for the next five or 10 years before deciding on a new place.

The Boyds were living in a golfing community and eventually moved to a smaller house on a smaller lot in a 55-plus community in the same city.

“It was not a financial burden,” Mr. Boyd said. “We had aged past the lifestyle we had in that house.” They were paying extra for the community’s country club that they rarely used, and he no longer wanted to maintain the lawn on his half-acre property.

The Boyds sold their house for about $500,000 and bought the new one for $450,000 with cash from the sale’s proceeds. A $300 monthly fee covers lawn care and access to a clubhouse with a fitness room, tennis courts and a pool.

“We moved for location and lifestyle, rather than finances,” he said. “We wanted proximity to our kids and our friends and the neighborhood we lived in for many years.” Their son, daughter and five grandchildren live nearby.

As for the Kisses, finding a place that could attend to future health issues was paramount. So was social interaction with other residents, including Mrs. Kiss’s sister, who lives in the complex. Mrs. Kiss, who is now the social chairwoman for her floor, recently organized a summer social on the patio with hamburgers, ice cream and “the whole works.”

“At the beginning, I had to get used to the fact that the place was so much smaller,” she said. “But I would walk to the lobby or the library or the rec room and hear a lecture in the auditorium, and I was fine.”

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