As you near retirement you will be required to make many important and sometimes irrevocable choices. Retirement housing decisions are among the most important. Should you payoff your mortgage prior to retirement?  What are you going to do with your home once you retire? Is it wise to stay in your house, or would you be better off downsizing?

There are two main benefits to downsizing: less stuff and no mortgage. Let’s look at each of these ideas a little closer to see if downsizing might be the right move for you.

Living Too Large?

Downsizing is the process of lessening your material possessions in favor of a more minimalist approach. This does not mean that you have to forego all of your stuff, it just means that when you retire you may not need your 3000 square foot split level home. Instead, you might just want a couple of bedrooms in a place with lower maintenance responsibilities.

Part of the struggle with downsizing is coming to grips with the fact that you may have to move on from the sentimental objects that permeated your adult life. This is a really tough reality and can be mentally and emotionally difficult. Prioritizing your values and the things that mean the most to you will be instrumental in getting you through this step in the process.

But a lighter load is not the only benefit of downsizing, there can also be financial benefits.

A Debt-Free Retirement?

Mortgage payments have eaten up large portions of your paycheck throughout your working life. And while there might be some tax benefits to having mortgage payments, most advisors agree that they are not a good weight to carry with you into retirement.

Your cash flow will alter dramatically once you enter retirement. Your hard work building your 401(k) and IRAs will take center stage and be the principal agent for supplying your income throughout this time in your life. These accounts are tax deferred so you still owe taxes on the balances.  Withdrawing from tax-deferred accounts to pay debts may end up being more expensive than you think. More income from tax-deferred withdrawals can make more of your Social Security taxable, make your capital gains and dividends taxable, or put you in a higher income tax bracket. If this is the case, it would be best if you were not responsible for a large mortgage payment.   

Another problem some retirees deal with is when the downsizing process leads to less housing space for more money and maybe even increased debt. Sometimes it’s easy to get emotionally caught up in downsizing and end up with less space while not improving your overall financial situation. Retirement should be an exciting new chapter in your life that should not be weighed down by debt if possible. If downsizing leads to the elimination of your mortgage, it is a great option to consider.  

A debt-free retirement gives you a blank slate — a place to add your own color and create a new masterpiece. Want to learn more? Contact Goepper Burkhardt. We’d love to talk to you about your retirement plan — and how your retirement housing plays into your overall strategy.