Best Financial Benefits of Downsizing in Retirement


If you are retiring soon, becoming empty nesters, looking to move to a more tax-friendly state or are overwhelmed with home maintenance, downsizing to a smaller home is enticing. However, does it make sense financially? Here are the best financial benefits of downsizing in retirement.

According to census data, the average home size in 1950 was 1000 square feet. In the 2011, that had jumped to 2480 square feet. While a large home may have made sense when the kids were around, empty nesters often find that they have more space than they need. With the need to reduce expenses in retirement, boost savings and have more time and ability to travel, there are compelling reasons to sell and move to a smaller home. Here are the best financial benefits of downsizing in retirement.

Financial Benefits of Downsizing in Retirement

Reduced Housing Costs

One of the biggest financial benefits to downsizing is that it reduces housing costs significantly. A monthly principal and interest payment on a $600,000 mortgage, with a 3% interest rate, would be $2530. With a $300,000 mortgage, same interest rate, the payment would be $1312. That is a savings of over $1200! In addition, you will pay lower homeowner’s insurance premiums and property taxes on a less expensive home. A smaller home will cost less to heat and less to maintain as well. The savings will improve your financial picture.

Boost Retirement Savings

Financial guru Dave Ramsay recommends investing 15% of your income into a Roth IRA or other retirement vehicle. The savings you will experience from reducing housing costs can create or boost your contributions to this retirement account. For instance, using the above example, a savings of $1200 per month, invested each month in a retirement account earning an average of 7% per year, will generate $55,723 after 20 years and over $109,616 after 30 years. Or, leverage the equity in your home and invest the proceeds from downsizing. Investing $100,000 for 20 years at an average yearly return of 7% will yield close to $400,000. .

Pay Off a Mortgage Early

One of the biggest drains on retirement funds is a continued mortgage payment. A financial benefit of downsizing is that you can use proceeds from the sale of a home to pay cash for a smaller one. Another option for those with less equity is to put 10-20% down on a smaller home and take out a 15-year, fixed rate mortgage. Apply an extra $500 to the new monthly payment. At even a 4.5% interest rate, you could pay off a $200,000 mortgage in less than 10.5 years.

More Money to Invest

Many look at their home as an investment. However, as the 2008 recession showed, homes do not always increase in value. According to Certified Financial Planner Bob Gustafson with the Titon Financial Group, the value in a home doesn’t grow as much as stocks. Certified Financial Planner Matt Frankel states “stocks tend to increase in value more quickly than real estate. Over long periods, an S&P 500 index fund has historically produced total returns in the 9–10% range. Meanwhile, real estate prices tend to outpace inflation, but not by much.” Downsizing frees up funds to invest. Gustafson echoes that – “Don’t look at your primary residence as an investment, look at it as quality of life.”

Energy Savings

Another financial benefit of downsizing is that you will save money on energy costs. A smaller space costs less to heat. In addition, downsizing to a newer home means that systems are newer and everything from lighting to hot water tanks to appliances are more energy efficient.

You are More Charitable

One of the hidden financial benefits of downsizing is that it forces you to get rid of unwanted items. You can give that “stuff” to needy individuals, sell it, donate it to charity or recycle, saving someone money or potentially putting money in your pocket. More stuff also means less to take care and maintain, freeing up your time to focus on activities that you enjoy. Downsizing also gives you a chance to get rid of things you are no longer using and to be intentional about what you buy to fill a new home.


Downsizing also gives you the flexibility to move when you want without having to worry about selling a home in a declining market. Without a mortgage to tie-you down, you have the flexibility to move quickly to take advantages of opportunities or to travel. When the majority of your wealth is in a single asset that takes time to sell, your choices are more limited.

Downsizing provides the financial benefits of reducing housing and utility costs, giving you more money to save or invest for retirement and the freedom to move on a whim or travel. If you are looking at downsizing, consult a real estate professional today.