3 Reasons Not to Downsize in Retirement

There are certain changes I'm planning to make in retirement that I'm pretty excited about. For one thing, I'm looking to ditch the Garden State and move someplace where property and income taxes are much lower than New Jersey's (which shouldn't be too hard to do, given how costly it is to live here).

Another thing I'm planning to do is downsize to a smaller home. I don't feel the need to pay for a larger space at that stage of life, and I certainly don't want to commit to the work involved in maintaining one.

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But while downsizing may be part of my financial plan in retirement, that doesn't mean it's the right choice for you. Here are three reasons you may not want to downsize once your career comes to an end.

1. It may cost you more than expected

Retirees are often told that downsizing can save them money. But when you add up the cost of real estate agent fees, hiring movers, and, in some cases, paying for long-term storage, the savings may not actually be all that significant.

Before you assume you'll come out way ahead financially by downsizing, actually run the numbers. If the savings are minimal and you want to stay in your home, you can look at other ways to make that arrangement work, like cutting non-housing expenses modestly.

2. You could end up with a much higher mortgage rate

If you have enough equity in your home that you can buy a new one in cash without needing a mortgage, then you don't have to worry about today's rates. But if that's not the case, downsizing could mean swapping an affordable mortgage rate for an exorbitant one.

Granted, mortgage rates can change over time. A new loan might cost a lot today, but if rates drop, refinancing may be on the table.

But if you're sitting on a mortgage rate in the 3% range, a new loan today might come with an interest rate that's twice as high. That could erode your savings significantly, if not fully.

3. You might upend your life and wind up unhappy

If you're able to downsize and stay in your neighborhood, it may not be such a big blow. But if moving to a smaller home also means ditching your community and social connections, that's more of a problem.

Retirement can be a tough transition as it is. Piling on by having to learn your way around a new neighborhood and being far from friends could make things needlessly harder.

There are plenty of good reasons to downsize once you retire, but that doesn't make it the right choice universally. Just as I have my reasons for wanting to downsize, you may have your reasons for thinking it's a bad decision. And if you do decide to stay put, there's nothing wrong with that provided you can manage the cost.

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