I'm far more baffled by 900 sqft not being enough for 2 people.
You seem certain that you need substantially more space, and you seem okay with paying more than double your current housing expense for more space...so that says a lot about your priorities.
My instinct? Buy the house, sell it if it ends up being too much and then you can always go back to 900 sqft ;)
Seriously though, it's impossible to say because you haven't indicated what your retirement income will be.
500K is already ~3X your gross income.
It's a lot, but it is doable if this truly is your main priority above all other priorities.
Only you can decide how much of a priority this is to you.
For me, we make far more than you do and would never ever spend that much on a house even though that is a normal price for a mediocre house here.
When we want house guests, we rent a big, luxurious AirBnB, which ends up costing less per year than just the additional property taxes on a bigger house.
We are also totally comfortable in 800 sqft. We actually just recently downsized from 1500 sqft because it was too much space, and 3 floors is too much.
That's us though. Those are *our* priorities, and they are no better or worse than yours.
Want to know something hilarious?
Our recent purchase of a small, inexpensive apartment is actually a terrible investment compared to if we had spent 500K on a detached home.
I'm in Canada where real estate is nuts in urban centers. My particular neighbourhood is in the early stages of exploding in property values. Had we spent more on a detached home, we would see insane profits if we sold in 5 years.
Instead, we bought a small one bedroom in a dated high-rise that will cost us thousands in the coming years when the elevator needs to be replaced. The plumbing is set up so that no unit can install a dishwasher or washing machine.
This new place will never make us any money. We might even lose money if we sell in 5 years.
So why did we buy it?
Because we're minimalists, we LOVE a high-rise view with a huge balcony, we LOVE having an indoor pool, saunas, and a 24h gym, we SO LOVE having heated indoor parking in the winter, and DH could never give up his new indoor pressure hose in the heated garage where he can spray the salt off of his bike in the winter.
For us, this place is our forever home (or at least the place we will live 6 months of the year once we retire), and it doesn't matter what it's resale value is because the plan is to never sell.
I'm looking far into my senior years and thinking of my already nasty arthritis and seeing no stairs and a pool and that looks like a great long term home for 80 year old me.
Why am I bothering telling you this?
Because these are the priorities that DH and I landed on after months and months of agonizing over what we should do. We had to buy a new place (long story), and the numbers favoured us buying a bigger more expensive place, but we just didn't want to.
We had A LOT of long walks and long talks where we worked the problem to death until we were both on the exact same page in terms of our values, priorities, and trade offs.
In the end, we chose our dream home.
As a compromise, we talked our dearest, recently divorced friend into buying a detached home/converted duplex that we agonized over not buying, and he's now living essentially rent free in a property that will rise precipitously in value.
The clincher for us was that at the end of the day, the move wouldn't speed up our FI date, it would just make the years until then less confortable, and we would just end up with way more money than we need. Our dear friend is much younger, and this move will change his life.
Figure out for yourself what real life trade offs your "dream home" is worth to you, decide from there.
Be realistic about the real life impact of the costs, and talk profoundly with your spouse about what they actually mean to your lifestyle.
What do the finances *really* mean to your lifestyle, what does the space and privacy *really* mean to your lifestyle, what do the extra years working *really* mean.
Only you can decide the value of these trade offs.
...but as I said before, you could always sell it in the future ;)