Downsizing your home in retirement: What you need to know

Thinking about a move after retirement? You're not alone. According to a recent Transamerica Center for Retirement Studies survey, almost 40% of Americans move after retiring. And of those movers, nearly 60% do so to reduce expenses or downsize.

Downsizing your home in retirement can help you free up cash and move closer to reaching your financial goals. But it isn't without its challenges. We'll explore the pros and cons so you can decide if downsizing for retirement is right for you.

If you're still living in the home where you raised a family, you may find yourself with too much space for your empty nest. Or you may just feel ready for something new. Downsizing can help you do a variety of things:

Does your current home have several stairs or a large yard that requires maintenance? You may not want to deal with those issues 20 years down the road. Downsizing to a one-level home or having a community that handles upkeep can simplify your life.

Now that you're no longer tied to a location for work or a certain school district, you have the flexibility to live where you want. So if you're seeking better weather, a more walkable city, or to be closer to family, switching locations can be a great opportunity to scale back and get ready for your next adventure.

If your aim is to reduce expenses or your tax liability, there may be additional financial benefits to downsizing for retirement and stretching your income a little further.

Selling your home can provide a windfall of cash, especially in today's highly competitive housing market. Your potential profit depends on several factors, including the value of your home and sales of comparable homes nearby. If you're able to turn a profit from selling your home, you can reinvest the proceeds for potential growth in the market. Investment performance is not guaranteed—but it does give your retirement fund the opportunity to grow.

Moving to a smaller space could bring savings on your mortgage or rent, utilities, maintenance and repairs. A study looking at the 20 biggest U.S. metro areas shows that some homeowners can save almost $200,000 over 10 years by downsizing from a four-bedroom to a two-bedroom home.

Homeowner's insurance is another opportunity to save: Areas with lower crime rates and fewer weather-related incidents tend to have lower insurance premiums. Those potential savings can support your hobbies, fund traveling or lessen the gap if you haven't met your retirement goal.

Taxes are an often overlooked opportunity to make your retirement income go further. Consider states with significantly reduced taxes on retirement income, property taxes, and estate and inheritance taxes. Wyoming, for example, has no income, estate or inheritance taxes and has low property taxes.

The above financial benefits are not guarantees, however. Because they depend on several factors, it's best to discuss your retirement downsizing goals with a financial advisor who can help you maximize your savings and avoid common pitfalls.

Downsizing your home in retirement provides plenty of opportunities to save. But without doing your due diligence, these savings can fall to hidden costs and fees. Consider the following expenses before packing up and moving out:

Depending on how much of the work you do yourself, there are costs associated with decluttering, prepping and staging your home for sale. Major repairs and renovations can also take a chunk out of your wallet—as can real estate agent commission, closing costs and other fees associated with selling your home. If you hire moving professionals, include the costs of packing and transporting your items as they can add up quickly.

While today's competitive market may help you pocket a profit on the sale of your own home, inflated home prices and low inventory may make it difficult to buy an ideal retirement home in your budget. Though you may be looking to downsize, you run the risk of paying much more for a much smaller house. Teaming up with a realtor early can help you get a sense of what your ideal home is selling for, and even keep you tuned-in to leads before they hit the market.

Try to estimate the cost of living in your new location. Even if it's not perfect, a close estimate will help you avoid unexpectedly paying more for utilities, maintenance and insurance premiums. If you're moving to a community with a homeowners association, be mindful of the expenses that can come with them.

If you're buying a home, get a sense of the property taxes in the area. It's also helpful to explore the state's revenue department website to understand how your income and retirement benefits will be taxed.

One tax in particular, the capital gains tax, may eat into the proceeds from selling your home. The amount you pay depends on what you profit from the sale, your income and your tax filing status. According to the IRS, most assets are taxed no more than 15%.

Although Thrivent does not provide specific legal or tax advice, a Thrivent financial advisor can partner with you and your tax professional. Be sure to connect with a tax accountant to better understand how downsizing will impact your tax obligations.

Selling your home can also impact your eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). In most states, you are eligible for Medicaid and SSI if your assets are below $2,000 (if single) and $3,000 (if married). Some assets, like your home, are excluded from this limit. Once you sell your home, though, any proceeds then count toward your asset limit—potentially putting you over the limit.

To better understand how downsizing will impact your government benefits, contact the Social Security Administration.

If weighing the financial benefits and challenges feels overwhelming, start with these five questions to determine if and when it makes sense to downsize for retirement:

The amount of equity in your home can help you determine whether it's a good idea to downsize for retirement. If you have a substantial amount of equity, selling your home can provide many of the financial benefits mentioned above. If you owe more than your home is worth, you could lose money when you sell.

Get a sense of how close you are to reaching your retirement goals. If you've still got a long way to go, downsizing may increase your cash flow and help put you back on track.

Look at your current home and what you spend on maintenance, repairs and utilities. Think through whether you want to continue committing that amount of money toward those expenses.

When you're decades into retirement, you want your home to still work for you. Is the house too big? Do you need all of your current space? Is there an opportunity to make your home more accessible? As you age, a spiral staircase may not be practical.

Consider whether it's worth investing in renovations or if it makes more sense to move and downsize in the process.

As with your home, your location should meet your needs as you age. Are you close to what you need, like airports, public transportation and health facilities? Are you close to what you love—fun, family and friends? How easy is it for you to get where you need to go?

Your current home may meet your needs throughout your retirement. Maybe you're in a great location that's close to your loved ones and you have everything you need. If so, moving may not make sense, at least not right now.

Take the time to answer the above questions. Better yet, talk through them with a financial advisor to find your best path forward.

Not sure how to approach downsizing for retirement? Let these steps guide you as you begin the process:

Where do you want to live in retirement? How do you want to spend your time? Your answers should guide your decisions and shine a light on the trade-offs you're willing to make while downsizing.

Look at your monthly retirement income and expenses to get a sense of your budget. This will uncover any gaps between the life you want to live and what you're able to afford.

Will you sell your home or rent it out? Are you buying another home, renting or moving in with family? Each option will affect your finances differently, so keep your budget at the ready.

It's never too soon to start conversations with a realtor. They can help you understand the value of your current home and point out the costs associated with the market you'd like to move to.

Tax professionals can keep you abreast of how your tax obligations may change while a financial advisor will help you create a financial strategy with your retirement goals in mind. With your team of professionals, you can paint a clearer picture of your savings and expenses in both the short and long term.

This process can look more achievable with a timeline that breaks down key milestones.

Downsizing your home in retirement can bring you closer to reaching your financial goals and simplify your retirement. Just be sure to stay aware of the potential costs and implications and bake them into your plan.

Start early and make a game plan—one step at a time.

Work with a financial advisor for help thinking through the best strategies to minimize your expenses, maximize your savings and stay on track to reach your retirement goals.