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How Advisors Can Help Clients Facing an Empty Nest

Tips to walk retirees and pre-retirees through the process of downsizing their home.

By Michael Rousseau

Due to the financial crisis and then the ensuing spike in real estate prices that priced many first-time homebuyers out of the market, young people are living with their parents longer than ever before. Still, when it finally comes time for the last grown child to venture out on its own, it’s an important milestone for all. For a young adult, it solidifies their independence, while for parents it’s both a point of pride and an opportunity to check off items on their bucket list one by one, whether that means traveling more or taking up a new hobby.  

For many retiree and pre-retiree clients, becoming an empty nester also signals that it’s time to downsize, a concept that has become so ingrained in the minds of many that it’s almost become a de facto part of the financial planning process. The large family house with the extra rooms, the spacious yard, the basketball court and the pool is an extravagance now, so it’s time to sell and find something more practical.

The logic is sound, but it’s rarely that cut and dry. There are several nuances to walk your clients through before knowing for sure whether downsizing is the right move for them. Here’s a sampling. 

What Is the Motivation?

Clients will often say they plan to downsize once their kids leave the house, even though they may have no intention of cutting costs: two concepts that are seemingly at odds with one another. Think about a pre-retiree couple who, after years of living in the suburbs, want to experience city living for the first time. In many large metro areas, that type of lifestyle can be very expensive, not only because housing costs are high but also due to property and local city taxes, which under the new tax law now face deduction limits. Or consider those who want to be closer to grandchildren who live in areas with higher costs of living. Then, of course, others will follow a more traditional retirement path seeking out a warmer climate and a home near a golf course. In each of these instances, the new property may be smaller, but it will hardly be less expensive—a reality they’re prepared for and willing to accept. While downsizing for some is about controlling costs in retirement, for others it means something very different. It’s up to you to find what is motivating them and structure their financial plan accordingly. 

Will the Windfall from Their Current Home Pay for All the Expenses Associated with Buying a New One?

Some of your clients are prepared to pay more for less, but chances are most will take a more conventional view of downsizing: They want to sell their current home and then use the windfall to both buy something cheaper without taking on a new mortgage and provide a jolt to their retirement savings. This is sometimes easier said than done. Realtor fees, closing costs and moving expenses can add up. Also, the current real estate market is a bit of a double-edged sword. Yes, it’s been an enormous boon for sellers but is trickier to navigate for buyers, since much of the available housing inventory in multiple markets around the country is concentrated in the luxury sector. That could put downsizers in a tight spot.

Will There Be a Capital Gains Hit?

Individuals don’t pay capital gains taxes on the first $250,000 of their home sale profits. For married couples, that exemption is $500,000. While most don’t have to worry about these thresholds, more and more transactions are getting hit with capital gains penalties thanks to exploding valuations in select markets. For instance, in West Bellevue, Wash., a wealthy enclave east of Seattle, home prices rose 93 percent last year to an average of $2.72 million. True, this is an extreme case, but other cities, including San Francisco, Boston and New York, have experienced huge spikes as well. These trends highlight why advisors need to be mindful of real estate capital gains taxes for homeowner clients who live in hot real estate markets. A $250,000 home at the turn of the century could be pushing $1 million now.

In recent years, it’s become almost fashionable to mock millennials in their mid-to-late 20s—and in some cases 30s—who still live with their parents, even as there are plenty of structural reasons why this became somewhat common. But as the economy continues to improve, these young adults are beginning to fly the coup, leaving behind millions of retirees and pre-retirees who may be tempted to downsize. Considering the above scenarios, the decision isn’t as black and white as it may seem.  

Michael Rousseau, CFP, is a financial planner with CCR Wealth Management, a Boston-area based firm.

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