Downsizing for Cash: Using Home Equity to Fund Retirement

A primary home has become a core part of millions of Americans retirement portfolio, but is subsequently the largest part for many. A recent National Institute on Retirement Security survey found that home equity accounts for one-third of total assets for working adults, while retirement accounts are behind at one-fourth. 

To tap into home equity, you either have to take loans out on the home, or sell it. With the median home equity for homeowners over 65 years old at over $250,000, selling may be the best option to have liquidity during post-working years.

If you’re considering selling, you’re not alone. A Fannie Mae survey indicates that 27% of older homeowners said they might sell at some point, and 17% said they have already sold or plan to sell their home.

WorkMoney put together a guide on downsizing for those who are heading towards retirement.

Why Downsizing Can Transform a Retirement Budget

After decades of paying down a mortgage and benefiting from home price appreciation, many homeowners reach retirement with a significant portion of their net worth tied up in their house. In fact, roughly 40% of homeowners own their homes outright, according to the U.S. Census Bureau. And with the median home sales prices right above $400,000, there is potentially significant equity for those looking to downsize to tap into.

Selling a larger home and moving to a smaller or lower-cost property can convert that equity into cash that can be invested, used to pay off debt, or set aside to help cover everyday living expenses in retirement.

Simultaneously, a smaller home typically comes with lower ongoing costs. Property taxes, insurance, utilities, and maintenance expenses often drop when homeowners move into a smaller or less expensive property. Reducing these recurring costs lowers the amount of income retirees need each month, helping their savings last longer. For many households, downsizing is a strategy that can improve cash flow, reduce financial stress, and make retirement spending more predictable.

The Emotional Side of Leaving a Long-Time Home

Letting Go of a Family Home

Downsizing is not only a financial decision, it’s an emotional one. For many retirees, a home represents decades of memories: raising children, celebrating holidays, hosting family gatherings, and building daily routines. Letting go of a house that has been part of your life for years can feel like closing an important chapter. Even when the move makes financial sense, the emotional attachment to a long-time home can make the decision difficult.

Reframing the Decision

Downsizing on the front can seem to be downgrading your lifestyle. Rather, it’s simplifying your life. 

A smaller home often means less maintenance, fewer repairs, and fewer responsibilities tied to a property. Instead of spending time and money maintaining unused space, retirees can redirect those resources toward experiences such as traveling more often or pursuing hobbies. 

Downsizing can seem as simple as a change in living space, but rather it’s a shift toward a more flexible and fulfilling stage of life.

The Net Gains: What You Actually Walk Away With

Step 1: Estimate Your Home’s Value

The first step is getting a realistic estimate of what your home could sell for in the current market. Homeowners can start by looking at recent sales of similar homes in their neighborhood, checking online home value tools, or speaking with a local real estate agent for a comparative market analysis. Setting a realistic price expectation early helps you understand the potential financial impact of selling and prevents overly optimistic projections about how much money you’ll receive.

Step 2: Subtract Selling Costs

Many homeowners focus on the sale price but forget about the costs involved in selling a home. Real estate agent commissions are often the largest expense, typically around 5% to 6% of the sale price. On top of that, sellers may pay for minor repairs, staging, closing costs, and moving expenses. Accounting for these costs ahead of time provides a clearer picture of what the transaction will actually look like financially.

Step 3: Calculate Your Net Proceeds

Once you subtract selling costs and any remaining mortgage balance, you can estimate your net proceeds—the amount of cash you’ll actually walk away with after the sale. Walking through this math in advance helps homeowners avoid surprises and better understand how much equity they can unlock from their home. 

For retirees considering downsizing, this number is key, since it represents the funds that could be used to purchase a smaller home, boost retirement savings, or provide additional financial flexibility.

Keep in mind any potential tax implications you may have from the sale of your home. It may be smart to contact a local CPA to understand what you may owe in taxes.

When Downsizing Might Not Make Sense 

Downsizing can be a powerful financial move, but it is not the right choice for everyone. If the financial gain from selling is relatively small, those costs can eat into the proceeds and make downsizing less worthwhile. In some cases, homeowners may find that the savings they expected from moving are smaller than anticipated once all transaction costs are accounted for.

Another factor to consider is the mortgage you would be leaving behind. Many homeowners locked in historically low mortgage rates during the past decade, and moving could mean taking on a new loan at a significantly higher rate. Downsizing can also come with lifestyle tradeoffs, such as leaving a long-time neighborhood, social network, or nearby family members. For some people, the emotional and community ties to their current home outweigh the financial benefits of moving.

Final Thoughts

Downsizing can be a practical way to convert years of home appreciation into usable retirement funds. By selling a larger home and moving to a smaller or more affordable property, retirees can free up equity that can help support everyday expenses, travel, healthcare, or other financial goals.

For many people, the decision is less about giving something up and more about creating flexibility for the next stage of life. A smaller home can mean lower housing costs, less maintenance, and more freedom to focus on how you want to spend your retirement.