6 Mistakes To Avoid When You’re Downsizing for Retirement
Downsizing for retirement reduces your expenses, frees up some extra cash and cuts down on the time and commitment needed to maintain your current home or lifestyle. If you do it right, you can even put that spare money and energy into other things — like upping your investments, building generational wealth and living the life of your dreams.
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However, several things can go wrong when downsizing. A lack of proper planning and preparation can be expensive and takes an emotional toll if you’re not careful. That’s why you should approach the downsizing process like anything else in retirement — with careful planning and consideration.
Before you start downsizing or get too far along, here are some of the biggest mistakes people make and how to avoid them.
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Underestimating the True Cost of Downsizing
One of the biggest reasons to downsize is to cut expenses and free up some spare cash. However, downsizing can be more expensive than anticipated, especially when people sell their current home for another one without calculating moving costs.
“While downsizing can ultimately help you save money in retirement, the moving process itself can be pricey,” said Terry Turner, financial wellness facilitator and senior writer at Annuity.org and writer for RetireGuide. “Homeowners association fees, getting your house market-ready, homeowners insurance, property taxes, real estate agent fees and purchasing new furniture for your space are just a few expenses that can add up during your move.”
Downsizing also takes a long time to get right, something people aren’t always prepared for. To avoid this mistake, Turner recommended setting clear expectations early to stay on track financially.
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Neglecting Your Emotional Well-Being
Retirement is a life-changing decision, and so is downsizing. But sometimes, people get so caught up in the financial side of things that they make hasty decisions or neglect their own emotional well-being.
“Another blunder is letting emotions drive the decision, leading to hasty choices like moving too far from family or ditching items they later regret,” said Jeff Rose, CFP and founder of Good Financial Cents. “Emotion-driven decisions result in regret or the realization that the new place doesn’t truly meet their needs.”
One way to avoid this mistake is to take things slow. If, for example, you’re planning to sell most of your things and move to a smaller home, don’t do it all at once. Take it one step — or one room — at a time, and spread it out. That way, if you start feeling overwhelmed, you can put the process on pause and recalibrate.
Waiting Until the Last Minute
Another common downsizing mistake is waiting too long to get started. Although the process is rather quick for some, it’s generally best to err on the side of caution and start early so that you don’t miss anything important or make decisions you’ll regret.
“It’s crucial to start planning early and to consider the full picture. Seek advice from a financial advisor who can help lay out all potential costs,” Rose said. “It might also be helpful to chat with friends or family who’ve gone through the process or even consider hiring a downsizing expert.”
Your retirement years could stretch for decades, so it’s better not to rush the downsizing process. Try to plan ahead and think about what you’ll need rather than just what you need right now.
Ignoring Tax Implications
Part of the downsizing process may involve selling your home or other assets. While that’s not a mistake, ignoring the possible tax implications is. This is because, depending on how much you profit from the sale of your assets, you could end up owing taxes.
Jen Reid, a financial planner and founder of Base, a financial planning, CFO and money management firm, emphasized the importance of understanding capital gains and preparing for any tax implications before selling your assets.
“Especially in this high gains market, if you are taking away a profit over $500,000 as a married couple and $250,000 as an individual, you need to make sure that you are strategically thinking about other income and assets that will be affected by this sale,” Reid said.
Purchasing a Home Not Suited to Your Needs
After selling your home, if you choose to go that route, you’ll still need somewhere to live. Whether you purchase a new house or rent a place, don’t ignore your long-term needs.
“It’s important to consider what style of home will be practical to navigate as you age, as well as how much space is realistic for you to be comfortable,” Turner said. “Choosing a home that doesn’t fit your long-term retirement needs could lead to discomfort in your new space.”
Think ahead in terms of mobility and accessibility so that you don’t end up regretting your decision. If you plan to modify your home later, be sure to account for the future costs.
Thinking You’re Downsizing When You’re Not
Although many people downsize because they think it will help financially, retirees often increase their spending rather than cutting back on costs, heavily impacting those who need the extra cash to help them live comfortably throughout their retirement years.
Reid suggested that some retirees might think they’re downsizing when they’re not.
“They may think initially that selling a home will help them decrease costs, but then there are other variable expenses that increase [costs],” Reid said.
For example, they might travel more or increase their spending in other ways because they think they have more flexibility.
Whether your decision to downsize is emotionally or financially driven — or a combination of both — take the time to make a solid plan and calculate your decision’s costs. Create a realistic budget and leave some wiggle room in case of emergencies or unplanned expenses. You can even consult a retirement specialist or financial advisor about your options.
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This article originally appeared on GOBankingRates.com: 6 Mistakes To Avoid When You’re Downsizing for Retirement