Five years ago, we (me, DH, and daughter) moved from 4200 sf to 1300 sf. We were rattling around in the big house, obviously, and it did not take me long to come to love my "little house". Of course, now I know that is all relative, and some people would not consider my house little at all!
We sold about 2/3 of all our stuff (wedding china and crystal, several rooms full of furniture, linens, knickknacks) and the sale funded our cross-country move.
One thing I hadn't really considered was that crap would continue to come into the house, and twice already in those five years we have taken a (borrowed) minivan load to GreenDrop.
I think to move again now, I would have no trouble at all living in a house the same size or smaller (depending on the layout). But we do have a semi-finished small attic and a dry basement, so we have boxes and Christmas decorations, and a futon nobody uses unless we get inundated with company, and if I had to move into a 2-bedroom/2-bath apartment, where would all that stuff go? I refuse to pay for storage, so I guess we would get rid of anything we couldn't use and then buy it again if we needed it in the future?
I have too much bedbug paranoia to buy furniture off Craigslist, so I would probably buying new...
Anyway... +1 to the idea of using vertical space. We drew up plans on graph paper and a friend built a "skybed" for our daughter in her 11' x 11' bedroom, so now she has a sleeping space, a lounging space (built on top of her clothes dresser), and underneath the skybed is a comfy chair and reading lamp, bins for her linens and blankets, and a laundry hamper. It totally opened up the room.