How to talk about moving to smaller room when money runs out for assisted living?

Wow...we went through this exact same thing with my 92 year old MIL just recently. When my FIL went on Hospice last November, my husband (the only child) realized they were living above their means in a deluxe 2 bedroom 2 bath retirement community apartment that was costing thousands a month, PLUS $52,000 was "missing" from money she claimed she had (she is always being scammed and there is no legal recourse to stop it). When he died, my MIL's income dropped more than 50%. Fortunately, an income based studio apartment opened up just down the hall. My MIL (also a narcissist who lauds herself above all others in the community) fought tooth and nail against moving into the studio because it meant she had to get rid of all her junk and it was a loss of status. My husband told her it was the studio apartment or the old folks' home where she would be in a tiny room with a roommate. She reluctantly moved into the studio and is now content there 5 months later.

I really feel for you right now. I truly hope it all works out for you with minimum stress. I ended up going on Lexapro for a few months just to get through it with my sanity intact. It is a hard situation.

If she has no way to pay for her current quarters there is no reason to involve her in discussion, because the single fact available is moving to the room the facility has offered.
If there is anything you can do to make THAT room more pleasant, more attractive, more potentially desirable to her, do whatever you can.
If the administrator is willing, I think she (MIL) will be less likely to go to pieces than if family is involved.
If there is another professional who would be willing to join the administrator, so much the better.
Unfortunately for her, you must make your mantra “There are no other alternatives”, then repeat as long as necessary.
There is actually a 50/50 chance that she may go along with her new situation peacefully.
Whether she does or doesn’t, those responsible for her care cannot assume responsibility for her reactions. She has dementia and is unable to make decisions. Her family has no choices to offer. Nothing needs or benefits from discussion.

Its not going to be easy. With Dementia she has lost the ability to reason. All she knows is what she wants.