When Does Downsizing Make Financial Sense for Washington State Public Employees?

You've worked in the public sector for decades, building your career and your retirement benefits. Now you're looking at your four-bedroom house and wondering if it still makes sense. With your kids grown and your retirement approaching, downsizing might seem like the obvious choice. But the decision isn't always straightforward.
The timing and financial impact of downsizing can significantly affect your retirement planning.
Core Principles of Smart Downsizing
Before diving into the details, here are the key principles every Washington public employee should understand:

1. Tax Timing Matters: Washington has no state income tax, but capital gains from your home sale still matter for federal taxes¹
2. Cash Flow vs. Net Worth: Focus on how downsizing affects your monthly budget, not just your total wealth
3. Healthcare Proximity: Consider future medical needs and proximity to quality healthcare facilities²
4. Market Timing Reality: You can't perfectly time real estate markets, but you can make informed decisions
5. DRS Benefit Integration: Your pension and retirement health benefits may influence your housing decisions³

Your 5-Step Downsizing Strategy
Step 1: Calculate Your True Housing Costs
Most people only think about their mortgage payment. Your real housing costs include much more.
Start by adding up these monthly expenses:

• Property taxes
• Insurance premiums
• Maintenance and repairs
• Utilities and services
• HOA fees if applicable

Example: Sarah, a state employee in Olympia, thought her $1,800 mortgage was her main housing cost. When she added property taxes ($200/month), insurance ($150/month), utilities ($180/month), and maintenance ($300/month), her true housing cost was $2,630 monthly.
Step 2: Assess Your Home's Current Market Value
Washington's real estate market has seen significant changes in recent years. Get a current market analysis from a local realtor or use online tools as a starting point.
Consider these factors:

• Recent sales of similar homes in your neighborhood
• Current market conditions in your area
• Any major improvements you've made
• Estimated selling costs

Reality Check: If you bought your home for $200,000 and it's now worth $400,000, that $200,000 gain isn't all profit. After selling costs of $30,000, your net gain is $170,000.
Step 3: Project Your Future Housing Needs
Think beyond just square footage. Consider your needs for the next 10-20 years.
Ask yourself:

• Will you need single-floor living as you age?
• How important is proximity to family or healthcare?
• Do you want to travel more in retirement?
• What activities matter most to you?

Step 4: Run the Numbers on Potential Savings
This is where downsizing can really pay off. Calculate the difference between your current costs and projected new costs.
Case Study: Tom, a DRS Plan 2 member, downsized from a $450,000 home to a $275,000 condo. His monthly savings were:

• Mortgage payment: $600 less
• Property taxes: $125 less
• Maintenance: $400 less
• Insurance: $75 less
• Total monthly savings: $1,200

Over 20 years of retirement, that's $288,000 in saved expenses, plus any cash from the sale.
Step 5: Factor in Your DRS Benefits
Your retirement benefits can influence your downsizing decision in several ways.
Consider how downsizing affects:

• Your retirement timeline (more cash might allow earlier retirement)
• Healthcare coverage (maintaining PEBB benefits vs. Medicare timing)
• Geographic flexibility (staying in Washington vs. moving to another state)

Alternative Approaches to Consider
Not everyone needs to downsize completely. Here are three alternative strategies:
The Rental Income Approach: Keep your current home and rent out rooms or convert part of it to a rental unit. This works well if you're in a high-demand rental area.
The Gradual Transition: Move to a smaller home in the same area first, then consider relocating later if desired. This reduces the stress of major life changes happening at once.
The Reverse Mortgage Option: If you want to stay in your home but need more cash flow, a reverse mortgage might work. However, this is complex and should be carefully evaluated with professional help.
The Geographic Arbitrage Strategy: Move to a lower-cost area within Washington or to a state with favorable tax treatment for retirees.
Your Action Plan
Ready to move forward? Follow these steps:

1. Get a professional home valuation from a licensed appraiser or experienced realtor
2. Calculate your true monthly housing costs using the approach above
3. Research your target downsizing options in your preferred areas
4. Consult with a tax professional about the timing and tax implications of your sale
5. Review how downsizing fits with your overall retirement plan, including your DRS benefits

Remember that downsizing is just one part of your retirement strategy. The best decision depends on your specific situation, goals, and timeline.
Sources and Resources

1. IRS Publication 523 - Selling Your Home
2. Washington State Department of Health - Aging and Long-Term Care
3. Washington State Department of Retirement Systems - Member Resources
4. Washington State Department of Revenue - Property Tax Information
   
5. PEBB Retiree Benefits Information

-Seth Deal