A Step-by-Step Financial Checklist for Downsizing
Making a smart decision about downsizing requires moving from vague ideas to concrete numbers. Running the numbers yourself is the most empowering step you can take. It transforms the question from “Should I downsize?” to “What would my financial life look like if I did?” This checklist will guide you through the key calculations.
Step 1: Calculate Your Estimated Net Proceeds
This is the amount of cash you will likely walk away with after selling your current home and paying all the associated costs. Don’t just guess; be realistic.
A. Estimate Your Home’s Sale Price: Look at recent sales of similar homes in your neighborhood on real estate websites. For a more accurate figure, ask a local real estate agent for a comparative market analysis (CMA). Let’s use an example sale price of $550,000.
B. Subtract Your Remaining Mortgage Balance: Find this on your latest mortgage statement. If you’ve paid it off, this is zero. Let’s assume you have $50,000 left to pay.
C. Subtract Estimated Selling Costs: This is a big one. A good rule of thumb is to budget 8% to 10% of the sale price to cover agent commissions, repairs, and closing costs. For our example, let’s use 9% of $550,000, which is about $49,500.
Calculation:
$550,000 (Sale Price) – $50,000 (Mortgage) – $49,500 (Selling Costs) = $450,500 (Estimated Net Proceeds)
This $450,500 is the cash you’ll have to work with for your next home and other goals.
Step 2: Create a “New Home” Purchase Budget
Now, let’s figure out how much of your proceeds will be used for your new home. Research is key here.
A. Research New Home Prices: Look at the prices of the types of homes you’re considering (condo, smaller house) in the areas you’d like to live. Let’s say you find a perfect condo for $300,000.
B. Add Buyer’s Closing Costs and Moving Expenses: Budget around 3% of the new home’s price for your closing costs, plus the cost of movers. So, 3% of $300,000 is $9,000. Let’s add $5,000 for movers, for a total of $14,000.
C. Add a “Settle-In” Fund: It’s wise to set aside money for immediate needs in the new home, like new curtains, small repairs, or a piece of furniture that fits the space. Let’s budget $10,000 for this.
Calculation:
$300,000 (Purchase Price) + $14,000 (Closing/Moving) + $10,000 (Settle-In) = $324,000 (Total Cost of New Home)
Now you can see the final result: $450,500 (Net Proceeds) – $324,000 (Total New Home Cost) = $126,500 cash freed up. This is the money you can add to your retirement savings.
Step 3: Compare Your “Before” and “After” Monthly Budgets
A lump sum of cash is great, but the real long-term impact comes from changes in your monthly cash flow. Create a simple side-by-side comparison of your housing expenses.
Current Monthly Housing Costs:
Mortgage: $800
Property Taxes: $500
Home Insurance: $150
Utilities (Gas/Electric): $300
Lawn Care/Maintenance: $150
Total “Before” Monthly Cost: $1,900
New Monthly Housing Costs:
Mortgage: $0 (Paid with cash)
Property Taxes: $250 (Lower home value)
Home Insurance: $75 (Condo insurance is cheaper)
HOA Fee: $350 (Covers exterior maintenance, lawn, etc.)
Utilities: $150 (Smaller space)
Total “After” Monthly Cost: $825
In this example, the monthly savings would be $1,075. That’s nearly $13,000 a year in extra cash flow to use for travel, healthcare, or simply reducing financial stress.
Step 4: Understand the Tax Implications
Finally, circle back to the capital gains tax. Using our first example, calculate your total profit. If your sale price is $550,000 and your original purchase price plus major improvements was $150,000, your gain is $400,000. If you are married and filing jointly, this is well under the $500,000 exclusion, so you would likely owe no federal tax. If your gain was $600,000, you would need to plan for taxes on that extra $100,000. Because tax laws can be complex, it’s always a good idea to discuss your specific situation with a qualified tax advisor before you sell.
