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Downsizing the Home for Retirement: Is It Worth It?

When approaching retirement age in an empty nest, is it better to age in place, or is it more economical to move to a smaller nest? Author and retired lawyer Boyd Lemon, who now lives in a rented one bedroom apartment in St. Marys, Ga., estimates his monthly living expenses are about $1,000 lower than when he lived in a three-bedroom condo he owned in California.

It seems a reasonable conclusion: Living on a smaller scale may mean fewer expenses, such as lower mortgage or rent, lower maintenance costs, and lower utility bills. However, a move to a smaller home does not necessarily guarantee savings.

Those considering scaling down need to consider the drop in value of their current home, fees and commissions on selling that property, and mortgage costs and refinancing fees, according to SmartAboutMoney.org, which draws from surveys conducted by the National Endowment for Financial Education. "If you can't cut your expenses by at least 25 percent, downsizing may not be a suitable option for many Americans," according to the organization.

There are also human factors that can work against well-intentioned retirees. "Many clients want to downsize, but their egos tend to get in the way," Caroline Delaney, executive vice president of Hillis Financial Services. "They may move into a smaller home, but many have difficulty actually cutting back money-wise. The initial purpose of downsizing is to have a smaller monthly outlay, yet the money they may save in mortgage payments ends up going to remodeling the new home or a new car payment." She recommends that retirees make sure they are actually reaping the benefits of scaling down.

(Read More: America's Top Places for Boomers to Retire)

"Taxes are also a crucial consideration when downsizing," Delaney said. "This varies by state and some research needs to be done if deciding to rent or buy during retirement."

Another cost to consider is lifestyle costs for those who move away from costly cities — and their entertainment and friends — and now will have to travel to get to them.

Meanwhile, retiree Lemon has found that divesting most of his material goods in his move to a smaller place has been a liberating step, though not one that is easy to quantify.

(Read More: Hitting 65, Boomers Seek Out 'Retirement Coaches')

"Unless you're a compulsive shopper, there's an incentive to stop buying stuff, and I have. It's a significant savings," he said. "I think, though, more important it's not just a matter of saving money, it's a matter of what you do with your time. If you don't have a lot of stuff, you save a lot of time not having to maintain it or repair it or go shopping for more stuff."

Since his retirement in 2007, he's written six books, most recently "Retirement: A Memoir and Guide."

Services have risen to help seniors downsize their lives, from the nationwide company Caring Transitions to retirement communities such as the AF Village West in Riverside, Calif.

"You need to establish current value of your existing home, calculate your share of any closing costs, what the financing costs are of the new home, and then calculate all the additional costs of moving, what your heating and cooling bills will be in the new home, and what if any repairs or improvements are needed in the new home," said Chris Seman, president of Caring Transitions. "If you don't have enough equity in the home the savings of moving could be quite minor. The decision then becomes, where would you be happier? If you save a very small amount to leave a home you love for one you do not, it isn't worth moving."

(Read More: Why Seniors Face Retirement 'Perfect Storm' in 2013)

Looking only at the numbers, it doesn't always pay to move, said Joel Danick, co-founder of TAD Relocation, "but if you take more than only the financials into consideration, the emotional piece, the social piece, the physical piece, then downsizing becomes less about the dollar figure and more about measuring the quality of life."

The timing of a downsizing is also a critical consideration, he said. "It is an almost inevitable event that you cannot physically and possibly even financially keep the house in which you raised your children," Danick said, "and the older one gets, the more difficult — physically and emotionally — a move gets. The longer you stay in a home, the more overwhelming it becomes to move. If you move when you can enjoy the move, then moving isn't traumatic."

Whether or not one decides to sell, "Cashing in on your home's value and downsizing should not be the only strategic card you are prepared to play in terms of funding your retirement," said Elle Kaplan, CEO and founding partner of Lexion Capital Management. "Ideally, retirement planning begins decades before you plan to retire."

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