Home Downsizing Has Become More Difficult, But It Still Pays

New barriers have made it harder to downsize, but it’s still possible if you take a careful approach.

Man holding house representing home ownership and the Real Estate business
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Finding a lower-priced home is not the only way to save money in a downsizing. It's about reducing overall costs and changing to a more suitable lifestyle. In fact, the average downsizer moves into a home worth just $27,000 less than the one he or she sold, Molony says.

Cutting back on mortgage payments is also critical for downsizers. "They are trading down and using equity usually to pay cash for this property," Molony says. "They want a smaller property and lower maintenance costs." Being near services and shopping is also a big goal and a way to cut transportation costs.

No one would argue that today's retirees can match the same level of financial security that defined benefit pensions provided. But with careful planning and budgeting, it can be done.

[Read: Your Home, The Big Tax Shelter Many Financial Planners Overlook.]

"People always say that when they retire and sell their homes they are not going to spend as much. But in that first couple of years after they move to a smaller home people often have more free money, and they end up spending more on eating out and travel," says Bill Allen, vice president of Schwab Private Client Investment Advisory. "It's only later they realize they are spending down too much of what they have."

People tend to plan "based on the best-case scenario," Allen says. "But you really need to be objective and stick to a financial plan and stay inside a budget to make your retirement sustainable." Some people avoid it entirely until they are forced to make a move by job loss or illness.

"When you downsize it tells the world you are getting older, and it becomes an emotional decision. Some people are not quite ready to make that change," DeSimone says. "People try to time the housing market, waiting for the perfect moment, but you can't sell a home overnight. You really have to start the process well in advance."