Downsizing Before Retirement

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Downsizing Before Retirement – Is It A Good Idea?

The final stages of planning for retirement can sometimes feel like a balancing act. Achieving the right combination of superannuation, investments, government entitlements and your family home all impact on one another. One of the biggest questions most pre-retirees ask themselves is about downsizing before retirement.

This is a tricky question to answer because it impacts your lifestyle and your family as well as your finances. So there are a number of things to consider when weighing this decision.

A Few Statistics

Research conducted by the Australian Housing and Urban Research Institute (AHURI) in 2018 found that while 26% of Australians aged over 55 have already downsized, or thought about downsizing (29%), 42% have not thought about downsizing at all.[i]

But if there is one thing we know, other than the importance of diversification, it’s the need for effective planning. So, let’s get to it.

What Are the Considerations?

Retirement Income Needs

For most Australians, particularly those living in Sydney, our biggest single asset is our family home. Releasing some of the equity in that home to provide income in retirement is a primary motivating factor for 35% of retirees.[ii]

Retirement Lifestyle Goals

Many retirees sited the desire to relocate to the country or the coast for a more relaxed lifestyle as a reason for downsizing, or for taking on a property with less maintenance, freeing up time for leisure activities.

Cost Reduction

Large houses can take a great deal of money to run and maintain. Downsizing before retirement can reduce running costs, which can help with management of retirement income.

The Cost Of Downsizing

If you are considering downsizing, it is important to do your due diligence and get good professional advice.

By the time you factor in selling costs such as agents fees, legal fees, buying costs like stamp duty, more legal fees and removalists, the leftover proceeds might not be as much as you had initially thought.

A good financial advisor and a trusted real estate agent can give you honest, constructive information on what your house is worth and what you are likely to get for your money when you are purchasing.

It’s Not All About The Money

Downsizing is not just a financial decision. There are emotional and practical considerations to take into account.

For many people, holding on to the family home because of its memories is important. Others may wish to hand it down to children.

However, from a practical perspective, there are a few things to consider. Realistically, as much as we’d all like to ignore it, we become less physically able as we age. So when thinking about your home in retirement, you need to consider:

  1. Will you be able to continue to maintain the house and gardens?
  2. Are there stairs which may become difficult to navigate as you age?
  3. Are shops within easy walking distance, or is there good public transport nearby, in the event you are no longer able to drive?
  4. Are there good medical services nearby, should you need them?

These things may not be issues for you right now, but when considering downsizing before retirement, it’s a good idea to give them some thought. If you make the right choices early, it can avoid the need for another move later on.

Managing Your Nest Egg

We have often talked about the importance of diversification in your financial plan. This is never more important than in retirement when you have limited opportunity to increase your nest egg or supplement your income.

Liquidating some of the equity you have in your family home by downsizing before retirement allows you to reallocate assets into other investments, thereby reducing risk.

Property is generally considered an illiquid investment compared to things like managed funds and shares. Redistributing this equity will allow you to access it if and when you need it.

Assets such as shares and managed funds will also provide you with an additional income stream, supplementing your superannuation, or any government benefits you might receive.

Finally, with the current interest rate situation, you may find you can achieve a greater rate of return through shares and other investments. A good financial planner will be able to give you advice on where the best returns are currently, and where they may be expected in the short to medium term.v

New Super Rules

Something you might also like to consider is a new rule in the superannuation space.

If you are over 60 and still working, you are now able to contribute the proceeds from the sale of your home to your Superannuation under the new Downsizer Superannuation Contribution measure, designed to provide incentives for empty nesters to downsize before retirement and free up larger homes for young families.

This boost to your superannuation nest egg can provide you with the opportunity to diversify, which as we are always saying, is an important measure of success in any financial plan.

The decision to downsize, or not to downsize, is an important one. Take the time to think it through thoroughly, do your research and get good professional advice before you commit.

If you are approaching retirement and are not sure whether downsizing is the right strategy for you, Manly Financial Services can help you understand your overall financial position, allowing you to make an informed decision. Please give us a call on (02) 9976 3388, or contact us via the below link.


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