Should I Downsize My Home When I Retire?

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

The Question Nobody Asks

There's a moment that happens in a lot of retirement planning conversations.

The numbers look good. Pension projections make sense. DCP account is solid. PEBB coverage lined up.

Then the conversation turns to housing.

"I keep hearing I should downsize," someone will say. "But honestly? I'm not sure I want to."

It's interesting how downsizing gets treated as a required step in retirement planning. Like there's a rule somewhere that says once you stop working, you have to move to a smaller place.

There isn't.

What the Tax Code Actually Says

Here's what matters from a tax perspective. When you sell your home, you can exclude up to $500,000 of capital gains if you're married filing jointly (or $250,000 if you're single).¹

The requirements are straightforward. You need to have owned and lived in the home as your primary residence for at least two of the five years before you sell it.¹

That's it.

If you've owned your home for 20 or 30 years in the Seattle area, you might actually approach or exceed that exclusion limit. Seattle-area home prices have increased approximately 455% from 1995 to 2025.² A house purchased for $200,000 in 1995 could be worth over $900,000 today. Even after accounting for capital improvements and other basis adjustments, you could easily have a taxable gain approaching the $500,000 exclusion limit.

For many Washington State public employees who bought more recently or in lower-cost areas, the exclusion provides more cushion.

The Real Cost of Staying Put

The question isn't really about taxes.

It's about cash flow.

When you retire early (say at 58 instead of 65), you're suddenly looking at fixed income for potentially 30 years or more. Your PERS pension provides a solid foundation. Maybe Social Security kicks in later. But everything else comes from your portfolio.

Property taxes don't stop. Neither does homeowners insurance. Or maintenance. Or utilities.

A three-bedroom house in Olympia might cost $4,500 per year in property taxes alone. Add insurance, basic maintenance, utilities, and you're looking at $12,000 to $17,000 annually just to keep the doors open.

Over 30 years of retirement, that's $360,000 to $510,000.

The Math Most People Miss

Let's say you own a home worth $650,000 with no mortgage. You're thinking about downsizing to a $400,000 condo.

The obvious math says you'd free up $250,000 in home equity.

Be sure to factor in closing costs associated with selling/buying a home.

But here's what changes after the move.

Your property taxes drop from $4,500 to maybe $3,000. Maintenance costs fall because the HOA handles exterior work. Your utility bills shrink in a smaller space. The condo HOA fee might run $250 to $400 per month depending on amenities.

You might save $6,000 per year on occupancy costs. Over 20 years, that's $120,000 in reduced spending. Plus the $250,000 in freed-up capital potentially growing in your investment accounts.

The financial case can be compelling.

When It Makes Sense to Stay

Not everyone should downsize.

The case for staying put can be just as strong as the case for moving.

Consider someone with a paid-off home where property taxes are manageable (especially with senior exemptions), who's comfortable handling basic maintenance, and who's lived in the same neighborhood for decades. The cost of staying might be lower than the transaction costs and disruption of moving.

Or think about the household where adult children and grandchildren visit regularly. Those extra bedrooms aren't wasted space if they're enabling family connections that matter deeply. The emotional value can exceed any financial efficiency from downsizing.

What matters isn't whether you stay or go. It's whether you've actually run the numbers and made a deliberate choice rather than just defaulting into whatever feels easiest.

What Actually Matters

The right decision depends on three things.

First, can you afford to stay? Run the numbers on property taxes, insurance, maintenance, and utilities for the next 20 years. Compare that to your fixed income sources and portfolio withdrawal needs. Be honest about what's sustainable.

Second, do you want to stay? Not what you think you're supposed to do. Not what worked for your neighbor. What do you actually want? If you love your home and neighborhood, and the numbers work, staying might be the right call.

Third, what's your backup plan? If you stay in a larger home through your 60s and 70s, what happens if your health changes at 80? Will you still be able to manage the property? Is there money set aside for home modifications if you need them?

Downsizing isn't mandatory. It's a choice. The question is whether it's the right choice for your specific situation.

Three Questions to Ask Yourself

Before making any decision about your home in retirement, answer these three questions honestly:

What will it cost to stay? Add up property taxes, insurance, maintenance reserves (typically 1-2% of home value annually), and utilities. Multiply by 25 years. That's your housing budget if you stay put.

What would the alternative cost? Price out comparable condos or smaller homes in areas you'd actually want to live. Factor in HOA fees, which typically run $250-400 per month for Washington condos.

What happens if you do nothing? The default choice is keeping your current home. If that's your decision, acknowledge it as an active choice rather than avoiding a decision. Make sure you've stress-tested the numbers against market downturns, unexpected repairs, and rising property taxes.

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If you’re concerned about your current financial plan and would like to explore the possibility of professional help, consider reaching out.

I specialize in helping Washington Public employees who are nearing retirement or are retired, reduce taxes, maximize pensions, and retire stress-free.

We offer a Free Financial Review, answering your big questions and showing you exactly how we can help, so you can make an informed decision about hiring us.

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-Seth Deal

Sources

1. Internal Revenue Service. "Publication 523: Selling Your Home." https://www.irs.gov/publications/p523
2. U.S. Federal Housing Finance Agency. "All-Transactions House Price Index for Seattle-Bellevue-Kent, WA." https://fred.stlouisfed.org/series/ATNHPIUS42644Q