Downsizing in Retirement Sounds Smart, but Here Are 3 Costs Retirees Often Overlook

Even if you save well for retirement, you may find money is tight. Between healthcare expenses and rising food and gas prices, your savings and Social Security benefits may be getting stretched thin.

In that situation, downsizing might seem like a financial win. You can sell your home, ideally pocket some equity, and move into a smaller place that comes with lower costs.

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It's a good idea in theory. But retirees are often surprised by the hidden or underestimated costs of making a move. Here are three downsizing costs that could erode the benefit.

1. Transaction costs

Whether you own your home outright or still have a mortgage, you can calculate the amount of equity you have in it by subtracting your mortgage balance from your home's market value. If the balance of your mortgage is $0 and your home is worth $900,000, you've got $900,000 in equity. But that doesn't mean you get to keep $900,000 in equity when you sell.

For one thing, you might have to pay a real estate agent a commission. Plus, you may be looking at real estate transfer taxes, depending on where you live.

If you're downsizing and signing a new mortgage, you'll generally be looking at closing costs, including appraisal and origination fees. All these costs could eat into your savings.

2. Moving and storage costs

If you're moving from a larger home to a smaller one, you may not be ready to part with your life's possessions. But that could mean having to bear the cost of a storage unit on an ongoing basis.

Plus, don't forget that moving isn't cheap. And if you're moving a long distance, you might shell out a lot of money just to transport your belongings.

3. Surprise new home costs

Just because you're unloading square footage doesn't mean your new home will be significantly less expensive. In theory, it should cost less to heat and cool a smaller space than a larger one. But if your new home has a less efficient HVAC system, that may not be the case.

You might also assume you'll save money if you move from a house to a condo. But high HOA fees could eat into your savings, giving you less of a benefit.

Run the numbers

All told, downsizing can absolutely be a smart money-saving strategy in retirement. But it's not a guaranteed financial win.

Before you rush to sell your home, think about the costs you'll incur and do the math on the actual savings you stand to reap. You may find that with some budget changes, you can stay where you are if your preference is to keep the home you know and love.

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