Five Reasons to Sell Your Home During Retirement

Five Reasons to Sell Your Home During Retirement

August 25, 2021

So far, 2021 has proven to be an excellent year for both home sellers who have been capitalizing on skyrocketing housing prices with increased demand and for homebuyers who can still lock-in record low-interest rates. It might be a good time to assess your personal situation. Maybe your home was initially purchased to meet the needs of raising a family or near a place of employment. You may find that crucial retirement funds are now wasted on no longer needed or important things.

While the housing market remains healthy, selling could be a good financial move that provides your retirement a nice boost. However, selling your home is a big decision and one that should not be made lightly. Whatever your retirement vision, where you will live should be part of your consideration. The more thought and planning you put into your options, the more likely you will be happy with the outcome. To help you get started, I’ve outlined five reasons to consider selling your home during retirement.

Eliminate Your Mortgage and Lower Your Income Needs

Your retirement plan should provide you with the current income that you need to support the lifestyle that you want. Housing is typically the most significant expense, coming in at almost 35% of the average retiree’s annual budget needs. 

Eliminating or significantly reducing the long-term annual mortgage expense can allow you to either upgrade your lifestyle now or keep more of your money invested for the future. Both of which can be appealing. 

You’ll still need a place to live, and you’ll have to decide if you want to buy a replacement home outright or take on a smaller mortgage, but either way, reducing your annual expenses along with tapping into the equity in your home could give you more options. 

Typically, the larger the house, the larger the costs of homeowners insurance, maintenance, and property taxes. Depending on your location, downsizing could reduce all those expenses too. 

Tax Break

If you sell appreciated assets within a taxable account to cover retirement expenses, you create capital gains. Depending on your current tax bracket and the length of time that you held the assets, those capital gains could generate a tax liability. Short-term gain occurs on securities held less than one year and are taxed at ordinary income tax rates. Long-term capital gains are typically lower than short-term rates. Most people qualify for the 15% long-term capital gains rate. Although if you are in a high tax bracket, the long-term capital gains rate increases to 20%, and if you are in the lowest tax brackets, the rate drops to 0%.

Compared to selling other appreciated assets, selling your primary residence comes with a tax break, regardless of your tax bracket. If you have lived in your home for at least two out of the last five years, you can exclude up to $250,000 of capital gains per person. So, a married couple could exclude up to $500,000 of gain.

Reduce Day-to-Day and Unexpected Expenses  

The upkeep and maintenance of your home are costly. 

Upkeep includes:

  • Your lawn and garden service
  • Weather-related clean-ups depending on where you live
  • Recurring costs

In addition to that, there are big expenses, particularly if you’ve been in your house for years. Typically, the older your home, the more maintenance it’s likely to require. Normal upkeep and repair expenses can be expensive. Replacing a deck, a furnace, a water heater, even a garage door opener can add up quickly. State Farm provides a rule of thumb on how much you should save for these costs annually so that you’re not caught short. They recommend saving between 1-4% of the value of your home in a maintenance fund. For a home valued at $200,000, that’s between $2,000 and $8,000 annually. Relocating to a newer home can lower these expenses and save you time and worry as well. 

Stay Involved and Close to Family

Staying in contact with the people you love matters and falls into the priceless category. While giving up the family home where you raised your children can be a difficult decision, moving close to them and making new memories with your adult children and grandkids can be very rewarding. Being involved in day-to-day activities, being available for advice, fun, and sometimes just for that extra pair of hands or shoulder to cry on has benefits for everyone. 

Selling your home may allow you to consider new locations that offer a lower cost of living and allow you to be near loved ones and activities that you enjoy.  

Planning for Aging-in-Place

A recent AARP survey found that 76% of adults age 50 and over want to stay in their homes as they age. The problem is that as you age, your existing home may have features that create mobility challenges—for example, stairs.

Your current house will most likely need renovations or retrofitting to make it safe and convenient as you get older. These renovations pay off - every $1 invested in modifications returns $1.50 in reduced medical spending for people ages 75 and older. But paying for them can be a problem. Downsizing to a new home that is built with aging-in-place considerations in mind can offer a cost-effective trade-off. 

The Bottom Line

Increased demand and all-time low mortgage rates could make this a prime time to sell your home. While it may make financial sense for retirees to downsize and eliminate housing expenses, it is not always easy. Selling a home is both an emotional and a financial event. Leaving behind years or decades of memories can be tough. If you need some help, we are happy to talk you through the math and help you think through your options. Feeling good about your decision and focusing on the positive aspects of downsizing can go a long way in creating a happy retirement.

This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website.  River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.