7 Financial Considerations When Downsizing for Retirement

3 6 minutes read

Editor’s note: This is the second of a two-part series. Part one explores mistakes people make and the two top factors to consider, even before cost.

When thinking about where you will live, cost is an obvious factor, especially for retirees who are living off their savings and have to make that money last a lifetime … but it’s not as clear cut as it might seem.

In my previous column, Three Steps for Evaluating a Downsize in Retirement: A Financial Planner’s Guide, I outlined what I believe should be the primary drivers of where you end up when you downsize: health and social relationships.

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I want to repeat that I believe that the cost of your new home should be the primary driver only if it’s a necessity. But for today’s purposes, let’s assume that you have checked the health and relationship boxes for the locations you are considering, and now are onto weighing cost.

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Below are seven key criteria to consider:

1. Housing costs: More than just dollars and cents

All the other categories we are going to talk about come with more black-and-white numbers than housing, because the true cost of housing involves a lot more than just the listing price.

I had a friend moving here to Washington, D.C., after completing his Ph.D. at Penn State. He sent me a listing for a beautiful new townhouse on the water just across the bridge.

It was close to D.C. and to a Metro subway stop, and it looked like a good deal. The catch? It was in a very dangerous area. It would be hard for him to know that, as an out-of-towner.

It’s also hard to decipher housing costs as a transplant. You can look at median housing costs, but they likely won’t tell the whole picture.

Here’s what we do know. Cities are more expensive. The Northeast and West Coast are very expensive. The farther you get from these places, typically, the less you will have to pay.

I always recommend that clients take a month-long trip to the metro areas they are considering. VRBO and Airbnb are making this much easier with long-term rentals. Cook meals in your rental. Walk around. Visit a coffee shop. See if you like life as a resident, not as a tourist.

The question most people ask when considering a move to a much cheaper home is: “How much more will I be able to spend per month?”

Of course, you can back-of-the-envelope this by just seeing how much lower your housing costs would be. But if you want the full picture that factors in tax rates, maintenance costs, etc., you need financial planning software.

You can access the free version of what we use. Enter “primary home relocation” as a goal to see the impact.

2. Estate/inheritance taxes can vary widely

From my office window in Virginia, I can see Maryland and D.C. Virginia has no estate or inheritance tax.

The District of Columbia has an estate tax but no inheritance tax. Maryland has both an estate tax and an inheritance tax. I’d literally swim across the polluted Potomac River to avoid the Maryland taxes.

As of 2025, fewer than a third of states have an inheritance tax, estate tax or both. As the federal estate tax exemption has grown so large, states have moved away from this tax. That said, this is still a consideration for many of our clients in high-tax states.

If you’re in Pennsylvania and can move five minutes down the road to Delaware, it may be worth it. If you live in Maryland, and can swim to Virginia, it may or may not be worth it.

3. Carefully compare state income tax rates

On the West Coast, if you’re looking for a tax-friendly place to put down roots you move to Washington or Nevada. On the East Coast, it’s Florida or Tennessee. In the South, tax-friendly Texas is for the cowboys and Musk-lovers. There are now nine states that have no income taxes.

Having no state income taxes is a pretty good sign that the state is overall tax-friendly, but it can often lead to higher taxes on some of the other categories we’ll discuss next.

Once again, the Northeast is expensive, especially when it comes to income taxes. The picture is not always black and white.

For example, in Maryland, the taxes look comparable to Virginia, with a progressive tax rate that tops out in the 5% to 6% range.

However, Maryland has county supplements that add up to an additional 3.2%, which puts the state in the same range as D.C.

This locality tax is not unique to Maryland and must be considered when evaluating new home states, counties and townships.

4. Property tax rates play a role

Often when income tax rates are low, property tax rates are high. See Florida and Texas. This can get a little muddy when you consider market value vs. assessed value.

In theory, these should be the same, but there are many areas where assessed values are considerably lower. Both Zillow and Redfin allow you to see past tax assessments.

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Many states also offer property tax discounts for seniors who have lived there for a specified number of years. It may not be a factor for that reason, unless you are considering downsizing in the same state.

5. Taxation on retirement accounts and pensions

Aside from your house, your retirement accounts are likely your biggest assets, and how they are taxed could have a big effect on your bottom line.

Retirement accounts. This applies to IRAs, 401(k)s, 403(b)s, TSPs and basically any retirement account that you have yet to pay taxes on.

Obviously, the nine states that have no income taxes will not tax distributions from your retirement accounts. But there are a handful of states that have a state income tax, but do not tax distributions from retirement accounts.

This is one reason that, while Pennsylvania is not often considered tax-friendly for workers, it is friendly for retirees. The more you have stashed away in pre-tax accounts, the more this matters.

Pensions. The reason these two categories are grouped together is that most of the states that exempt retirement account distributions exempt several sources of retirement income.

You should pay particular attention to this category if a large percentage of your retirement income is from a public or private pension.

An increasing majority of states fully or partially exempt military pensions. As of 2025, California and D.C. are the only two places that fully tax military pensions.

Most states do not tax income from Social Security. Some of the few that do include Colorado, Connecticut and Vermont. Like so many of these things, this is not black and white. The majority of the states that do not tax Social Security have income bands or AGI limits on those tax benefits.

7. Don’t be dazzled by states with no sales tax

Delaware is often referred to as the “tax-free state.” This is misleading. Delaware has property taxes and income taxes but does not have sales taxes.

I think the focus on sales tax is often overrated. Let’s say that you spend $10,000 per month. In many states, only about 50% of that spending is subject to income taxes.

Let’s say you pay 5% on that $5,000, that’s $250 per month or $3,000 per year. That’s the difference if you’re comparing 5% to 0%. The point is that you should not let a few points’ difference make or break your decision.

The bottom line on considering housing costs in retirement is that you need to look beyond the home’s price. Taxes can be a huge factor for retirees, and taking them into account is always a smart idea.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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