Deciding whether to sell your home when you retire is a complicated question for most people. You’ve got lifestyle issues on one side of the ledger and financial realities on the other.
Many people put their quality-of-life first when making this decision, says Jamie Hopkins, retirement income co-director at The American College for Financial Services in Bryn Mawr, Pa. (A full 83% would prefer to age in place, according to a 2016 survey from the American College.)
But given that many nearing retirement have a savings shortfall, and historically low interest rates aren’t helping that money grow, it’s wise to consider the financial side of this equation as well, says Mari Adam, a Certified Financial Planner and president of of Adam Financial Associates in Boca Raton, Fla. “You have to look at the mechanics of the situation,” she says.
Here, six questions to help you do just that:
1. Do you need the money?
If you could use extra funds to cover your expenses in retirement, don’t overlook the equity in your home. On average, people age 65 and up have more than $200,000 in home equity, according to a 2015 Merrill Lynch study, yet they have less than half that amount in retirement savings, according to The American College.
If you’re facing a savings gap, it might be advisable to sell your home, since the profit could be invested or otherwise used to supplement your nest egg, says Adam. She speculates that some retirees don’t sell their homes because they’re afraid they’ll owe capital gains tax on the sale, but few people actually will owe this tax. If you’re married, you can take up to $500,000 in profit from the sale of your residence tax-free; up to $250,000 if you’re single.
Also, even if you own your home free and clear, living there is not really “free,” Adam notes. You need to factor in the yearly cost of maintaining your home and paying property taxes and homeowners insurance as well as the opportunity cost of lost potential investment income. “Your home’s value will keep pace with inflation, but it’s not typically a growth proposition,” Adam says.
2. Can you afford to move?
Moving might lower your cost of living, but don’t assume it will, says Hopkins.
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For one thing, many people who sell their homes in retirement don’t actually downsize. “They might move to a smaller home, but often it’s a nicer one or one with more amenities,” notes Hopkins. Indeed, a 2015 Nielsen study found that 46% of people who intend to move when they retire actually plan to upsize, by moving to a bigger place or paying more for a similar home.
For another, you might not be up to speed on the reality of home prices or apartment rents. “Get out there and look around, so you know what the prices are today,” Adam advises.
Finally, selling, moving and buying a new home can add up to a hefty expense. Be sure to factor in closing costs; Realtor fees; moving expenses and any lifestyle changes that might increase your budget.
3. Can you afford to stay?
Contrast the cost of moving with the cost of staying. Aside from property taxes, homeowners insurance, utilities and routine maintenance, you could get socked with an unexpected, expensive repair.
Also, at some point, because of health issues or just getting older, it’s likely you’ll need to pay for accommodations in your home, such as a bathroom renovation, says Hopkins.
So when you do the math, consider whether selling and moving might give you access to a more comfortable lifestyle over the long-term rather than staying put.
4. Do you want some freedom?
For Mary and Roger Burns, deciding to sell their home in Fairfield, Conn., was a no-brainer once their youngest child went to college last year. “We don’t need a big place anymore,” says Mary, 58. “I’d like a smaller house — and we’d like to do some traveling.”
The couple also wants out from the maintenance, yard work and pricey property taxes. They enjoyed living in a good school district when their three kids were young, “but we don’t use the schools any more, and we might like a town where the taxes are lower,” Mary says.
She and her husband plan to rent for a while and maybe try out moving someplace further South for a year. They’d like the freedom to explore, but are aware of the trade-offs: “It’s hard to move to an area where you don’t know anyone,” Mary says, especially if you’re retired and don’t have local contacts to build a new social life. And speaking of social ties…
5. How important to you is your current community?
Not only would most people prefer to remain in their current home when they retire, a big draw is keeping their social network, the Nielsen study found. Of those willing to move, over half said they want to remain within 30 miles of where they are now and 67% plan to stay in the same state.
The cost of remaining in your home might be high, but many people are willing to pay the price if it helps them maintain those key relationships in retirement.
6. Would you consider a reverse mortgage?
Although most retirees want to age in place, only 14% would consider using a reverse mortgage as a way to remain in their homes, according to The American College survey. And in a March 2017 National Council on Aging survey, 66% of older homeowners said they’d need to do more research to understand a reverse mortgage.
Basically, a reverse mortgage is a way a homeowner age 62 or older can access some home equity, as a lump sum or a line of credit. The loan becomes due when the homeowner moves, sells or dies or fails to pay property taxes or homeowners insurance or maintain the property. (This Next Avenue article explains reverse mortgages in some detail.)
These loans can complicated, you have to pay close attention to their fees and they’re not for everyone, says Hopkins. But it’s also possible that a reverse mortgage can provide you with income and allow you to stay put.
The Bottom Line
Given how many factors are at play, it’s not surprising that many people put off running the numbers and exploring all the housing options before retiring. It’s a complex calculus, Hopkins says, and many homeowners don’t have a financial plan that includes a cost-benefit analysis of whether to sell their residence.
His advice: Create one sooner, rather than later. “Starting in your mid-50s, say five to seven years out, this choice should be factored into your financial plan,” Hopkins says.