My parents, in their early 80s, moved recently from their East Coast home to be near my sis- ters in California. It was in many ways a classic retirement downsizing. They replaced a five-bedroom colonial with a small ranch, profiting after 43 years of ownership. In their new residence, they’re thrilled to benefit from lower utility costs and property tax- es, milder weather, and the company of two young grandsons who live four blocks away.
Despite those benefits, my parents and I discovered that moving in retirement also has unique financial and emotional challenges. They gave up a neighbor- hood, friends, and a place of worship they knew and loved well. They discovered costs to moving that they hadn’t anticipated.
IS RELOCATING FOR YOU?
As much as people talk about simplifying their lives by downsizing in retirement, most don’t choose it. When Consumer Reports National Research Center recently asked retired Consumer Reports subscribers ages 55 to 75 about moves they’d made in retirement, only 10 percent said that they’d downsized.
That figure doesn’t include the experience of older retirees, who may end up moving to a smaller, more manageable space or moving in with family. But the survey finding rings true for Ed Kohlhepp, a certified financial planner in Doylestown, Pa. “Clients don’t necessarily want go from 2,400 to 1,500 square feet, or from three bedrooms to one,” he says.
Rather, many want to keep conveniences they’re used to and even add new ones.
Kohlhepp moved in his early 60s to a house about 10 miles away that’s a bit larger than his previous one. In their new community, he and his wife pay a monthly fee for all outside maintenance. “It was al- most a parallel move financially, but we get someone else doing the outdoor chores, security, and a master bedroom on the first floor,” he explains.
If you’ve owned your home for decades, you may well gain from selling it, despite the recent downturn in many real estate markets. But too large a gain can subject you to significant taxes. Couples and unmar- ried widows or widowers must pay federal capital gains tax on home-sale profits that exceed an exclu- sion of $500,000. (For single and divorced people, the exclusion is $250,000.) If your marginal income tax rate is 15 percent or less in the year you sell, you may not owe any tax on the profit. But high earn- ers can face a federal long-term capital gains rate of 20 percent plus a new, 3.8 percent net investment income tax, as well as any state capital gains taxes.
Even without a tax bill, a move generates signifi- cant expenses. Major costs include fees for real estate brokers and lawyers, and movers’ expenses. My par- ents paid someone to haul carloads of unwanted stuff from their house to the dump, and another person to sweep up before the closing.
They paid for an appraisal fora piano they wanted to donate. And they left me with an old car that they feared wouldn’t pass California’s emissions standards.
Some expenses may be higher in your new digs— or at least no less costly. Kohlhepp says his condo’s initial maintenance fee of $240 per month was about equal to what he used to pay on average for shoveling, landscaping, and other outside work. But his property taxes—for a larger, newer space—were higher.
WILL YOU LOSE BENEFITS?
A home sale could affect other aspects of your financial life. If, for instance, Veterans Affairs provides you with health care benefits based on your income, home-sale profits that improve your financial status could trigger an end to that ben- efit, says Mitch Adel, an elder law specialist and senior partner at Cooper, Adel & Associates in Centerburg, Ohio. Veterans receiving benefits are required to report to the VA any changes in net worth and growth in household income, among other bottom-line developments.
According to the VA, household income of $31,443 or more could disqualify certain ben- eficiaries. Similarly, downsizing can create nightmares for seniors receiving Medicaid as- sistance for in-home care, Adel says. Your home is exempt from Medicaid’s asset-based eligibil- ity formula, but a home-sale profit that raises your assets above a given threshold could negate those benefits temporarily. You would have to spend down that profit on out-of-pocket medical expenses before Medicaid would resume your benefit, Adel explains.
And uprooting has emotional costs, even when seniors are moving nearby. You’ll need to familiarize yourself with a new routine and neighbors, and per- haps new places to worship and shop. That may in part explain why only 35 percent of respondents in our survey said they’d moved since retiring.
Kohlhepp says that even his 10-mile relocation required adjusting. “Your neighbors are not your friends anymore,” he says.