Pros and Cons of Downsizing in Retirement

The decision to downsize to a smaller home for retirement is a highly personal one, depending largely on the individual’s financial goals and desired lifestyle. Downsizing can lower your cost of living so you can pursue a better lifestyle. However, it can also be a difficult adjustment, with potential impacts to your tax situation and even your government benefits. To determine whether this is the right fit for you, consider these pros and cons of downsizing for retirement.

Before finalizing your decision, consider speaking with a financial advisor to fully understand if you’re making the right call for you.

Understand Your Goals for Downsizing

The first step in deciding whether to downsize is to list the specific financial and lifestyle goals that you hope to achieve. Are you hoping to save money and create more flexibility in your budget? Or perhaps you are hoping to move to a new area to be closer to family. Whatever the reason, keeping these goals at the forefront will help you as you weigh the pros and cons of downsizing for retirement and how each impacts you.

Financial Aspects of Downsizing

When evaluating the financial aspects of downsizing, you must first consider the potential cost savings that may result from a move. This could be due to financing or property maintenance costs.

Real Estate Costs

There are several real estate costs that you will need to account for when downsizing for retirement.

Property taxes. The median property tax for U.S. homeowners was $3,500 in 2024, an increase of 2.8% from the previous year. However, your property tax rate depends on where you live, with some states charging higher taxes than others. This can significantly impact the overall cost of downsizing.
Mortgage rates. Current mortgage rates are 6.3% for a 30-year fixed mortgage, as of October 2025. However, these rates can vary, depending on factors like your credit score, the type of loan and the size of your down payment.
Insurance. Homeowners’ insurance premiums cost an average of $266 per month, as of August 2025, but rates vary by location and size of the home.
Closing costs. Keep in mind that you will have to account for closing costs when selling your current home and purchasing a new one. Closing costs typically range from 3% to 6% of the loan amount.

Another consideration is utility costs. While they may decrease in a smaller home, certain places have higher utility rates than others.

For example, Susan is a retiree who lives in a state with a property tax rate of 1.50%. She pays $4,500 in annual property taxes for her current home, which is valued at $300,000. However, by moving to a smaller home that is worth only $200,000, she could potentially save $1,500 per year in property taxes – money she can then use on travel or everyday living expenses.

Although downsizing often reduces your expenses, it is important to remember that this is not always the case. Be sure to examine the associated costs carefully to ensure it makes financial sense for you.

Maintenance Costs

Maintenance costs can be another significant consideration when downsizing for retirement.

In general, smaller homes require less maintenance, leading to potential cost savings and a reduced time commitment for upkeep. However, some smaller homes, like condos and townhouses, may have additional maintenance fees or homeowners association (HOA) fees that need to be factored into the decision.

These additional costs vary by location and type of housing, so it is important to carefully consider how much property maintenance will cost before you move.

Say a retiree named Bill is weighing a few housing options when downsizing. To compare maintenance costs, he first looks at a condo with condo fees of $300 per month, including maintenance and insurance. Then, he considers a single-family home with an estimated monthly maintenance cost of $200 and an insurance cost of $100 per month.

After analyzing his options, Bill chooses the condo because he prefers the hassle-free, low-maintenance lifestyle, even though the costs are similar.

Pros and Cons of Downsizing in Retirement

You can more clearly weigh whether downsizing makes sense for your retirement after estimating the costs and savings of moving.

Once you determine the potential costs and savings associated with a move, you can better examine the pros and cons of downsizing for retirement.

Pros of Downsizing

The benefits of downsizing are both financial and lifestyle-related.

Lower living costs. Downsizing typically lowers your housing costs, and consequently, your overall cost of living. A smaller mortgage, or the elimination of your mortgage altogether, could lead to significant savings and greater peace of mind.
Increased financial security. With lower living costs, retirees may find themselves in a more stable financial situation.
Simplified maintenance. Smaller homes may require less upkeep and maintenance.
Change of location. Downsizing may enable retirees to move closer to family or move to an area with better access to amenities, a more desirable climate and a lower cost of living.

Cons of Downsizing

There are also several potential drawbacks.

Emotional attachment to the current home. It can be emotionally difficult to leave a family home or one that has other sentimental value to you.
Adjusting to a smaller living space. If you have lived in a larger home for a significant amount of time, it might be hard to downsize.
Loss of social connections. Moving may require you to leave behind friends and connections within your current community, which can be difficult at any age.
Additional fees. Some smaller homes, such as condos or townhouses, may require additional maintenance and security fees.
Less room for family gatherings. With less space, hosting large gatherings and visits from family members may become more challenging.
Not guaranteed to save money. There are additional costs when you downsize, especially if you do not have a home to sell but are looking to buy one. You are not always guaranteed to save money, so you must approach downsizing carefully, depending on your situation.

The Impact of Selling Your Home on Government Benefits

Selling your home can affect government benefits such as SSI, Medicare, and Medicaid, and may also influence how your Social Security income is taxed.

While selling will not make you ineligible for Social Security, the proceeds could impact tax treatment or Medicaid eligibility. It is important to seek expert guidance before selling if you rely on these programs for income or healthcare.

Consider the Tax Implications

Selling a home may trigger capital gains tax if the profit from the sale exceeds $250,000 for single individuals or $500,000 for married couples. The long-term capital gains tax rates are 0%, 15% or 20%, depending on your income.

If you own the property for less than a year, it is taxed as ordinary income. Some exemptions exist for homeowners who have lived in and owned the property as their primary residence for two of the past five years.

How Downsizing Can Affect Your Broader Financial Plan

Downsizing your home can influence more than just your housing costs. The decision can also have other financial implications, affecting your retirement income, taxes, estate plan and overall financial flexibility.

When planned carefully, selling a larger property and purchasing a smaller one can free up home equity that may be used to strengthen your long-term finances. For example, proceeds from a home sale could be added to retirement savings or used to pay off debt, or you can set them aside for future medical or living expenses.

However, how you choose to use these funds can have tax and income implications. Adding money to taxable investment accounts may increase your income for the year, which can affect your tax bracket or Medicare premiums. Placing the proceeds into tax-deferred or tax-free accounts, such as IRAs or Roth IRAs, could help reduce that impact, depending on your eligibility and financial situation.

Downsizing can also simplify estate planning. Managing a smaller home is generally easier for heirs, and the sale of a larger property may provide assets that can be distributed more efficiently through gifts, trusts or charitable giving. Retirees who plan to leave a financial legacy can use the transition as an opportunity to update their estate planning documents, including their wills, beneficiaries and estate documents.

It is also important to review insurance and healthcare considerations before moving. Relocating may affect property insurance rates, access to healthcare providers or state-specific benefits programs. These factors can influence your long-term costs and the sustainability of your retirement budget.

Bottom Line

Deciding to downsize in retirement should depend on your goals and budget so you can choose what works best for your situation.

In the end, the decision to downsize in retirement should be primarily based on your goals and what your budget will look like after downsizing. By carefully considering these factors, you can make an informed decision that best suits your needs and enhances your retirement experience.

Retirement Planning Tips

Having a savings goal is the first step of any retirement plan. SmartAsset’s retirement calculator can help you estimate how much money you’ll need for your golden years based on your current savings, your projected spending in retirement and your Social Security benefits.
A financial advisor can walk you through the complex process of retirement planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.