Downsizing and Investment Strategies for Retirement

By: Frances Black

Two retirees who are choosing to downsize in retirement.

Downsizing from your current home can make a lot of sense for retirees — or even older people still in the workforce. Most real estate accrues over the long run — the Great Recession notwithstanding. Provided you can find a reasonably priced replacement property and a good mortgage rate, residential sales can unlock capital that in later years can help fend off that most morbid of retirement bugaboos: longevity risk.

The 4% Rule

A couple calculating the 4% rule, part of their downsizing and investment strategies for retirement.

Longevity risk measures the likelihood that you will outlive your money. The typical hedge against this is to employ the good old 4 percent rule, which decrees that in any given year, a retiree should withdraw no more than 4 percent of his or her savings. A simple life expectancy calculator can help you determine if the rule will work for you. However, the formula does not consider market fluctuations and inflation.

Unlike Social Security payments, private retirement income does not come with a guaranteed yearly cost-of-living increase. Stock price growth can help, but it is unpredictable. And if your portfolio today seems like it might run short over time, downsizing your real estate and investing the proceeds may be just the ticket.

First, Consult an Agent

Step one is finding a reputable real estate agent. That agent should be able to tell you how much you will get for your current home. If you are looking to buy a new home in the same market, that agent can also help you determine if downsizing makes sense. They might also be able to put you in touch with recommended agents if you plan to move to a new state or town.

Next, Maximize Sale Value

A woman adding some curb appeal to maximize the value of her property.

Spruce up your home to maximize its value. You want to take steps to get as much for your current property as you can. This effort can range from easy, no-cost strategies such as getting rid of clutter or cleaning up the garden beds to more expensive renovations to make your home more attractive or to bring it up to code. When preparing your home for potential buyers, it is important to consider factors such as curb appeal, interior design, and your roof style, as these elements influence the impression and marketability of your property.

Invest the Proceeds

Downsizing for financial purposes alone makes sense for two reasons: reducing monthly cash outflow and/or providing cash that can generate increased retirement income. The good news is that capital gains on most residential sales are exempt from taxes for the first $250,000 for individuals or the first $500,000 if filing jointly.

How much of this you should invest into a new place to live and how much goes into investments depends on your situation. A new mortgage or a rental that does not tie up all your cash might make sense. But you have to do the math. And if you are among those lucky people who make more than the tax-exempt amount from a sale, you may wish to investigate sheltering the income by purchasing a new home.  

Assess Financials

All sorts of investment advisors will have ideas of what financial products you should buy with your money. An annuities salesperson might tout deferred annuities or single premium annuity (SPIA). Other advisors might like inflation-protected government bonds. I put my own money in mutual funds rather than individual securities. But all funds are not alike.

One broker put me in a fund that he said would protect me should the markets go down, a real concern. But the fund’s growth was miserable, and the broker was making more money off my investments while I was losing it. So, I fired him.

My investment strategy these days pretty much passes as conventional wisdom. Keep a nice cushion of cash so you never have to sell at a loss and put the rest of the money into a diversified portfolio of no-fee index funds for both stocks and bonds. Stock growth helps your money keep pace with inflation, while cash and diversity reduce the risks from market fluctuations. It works for me, but I would not dream of doing this without an investment advisor.


A group of retirees who are celebrating, symbolic of their successful downsizing and investment strategy.

Your house is a treasure in more ways than one. When you downsize, prudent investing can turn this treasure into an enduring asset for a more comfortable retirement. If you are ready to make an informed real estate decision for your retirement, contact Realty Executives and discover the perfect downsizing and investment strategies to secure your future.

About the Author: Frances Black is a writer and gardener living in a 200-year-old farmhouse. She was born in Michigan and has worked as an editor for the financial and economic press.

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