When is the right time to downsize?
Downsizing from a larger family home to somewhere smaller can be an obvious choice when retirement is on the cards. For others it’s a necessity and something they do reluctantly. So when it comes to timing your decision, what’s the right approach to getting the best outcome for you and your finances? When is the right time to downsize?
We talked to CERTIFIED FINANCIAL PLANNER® professional Anne Graham, principal financial planner at Story Wealth Management, about what you need to consider when looking at your options.
What are some of the triggers for people to think about downsizing?
There are basically three life events that can act as a catalyst for downsizing. When you get ready to retire, you’re looking at your finances and lifestyle, including your home and where you want to be living. If your partner were to die, you’d also be likely to consider whether the home you’re in is right for you. And if you start to have health or mobility issues later on, selling and moving into a retirement village or aged care is often the next step.
Are there any advantages to downsizing sooner?
From a practical perspective, it can be better to wait until after you retire to take on the task of selling your home and finding a new one. You’ll have more time and energy to look around and make a really considered decision about where you want to move to and what kind of home you’ll need. On the other hand, you might be better off tackling the process of selling up and moving when you’re younger, more resilient and can make the change because you want to, rather than having it forced upon you. Being excited and positive about moving and making a new start can make it a lot easier to take on tasks like sorting through possessions and packing boxes.
How can your financial position influence when you should downsize?
It depends on a number of things but two of the most important factors are whether you own your home outright and how much you already have in your super. If you’re expecting to boost super from the sale of your home, it’s worth planning ahead for this. Under current legislation, you can continue to contribute to your super until you’re 75, but after age 65 you’ll need to satisfy a work test to show you’re in gainful employment for 40+ hours in 30 days to continue with your contributions. So it’s generally much more tax effective to sell before you reach this age and make lump sum payments into your super over time, because there are annual caps on how much you contribute each year too. If you’re in a couple and one of you is younger, then you’ll have a larger window of opportunity to pay proceeds of sale into your super accumulation fund.
Owing money on your property after you retire isn’t ideal and having that ongoing financial burden can put you in a vulnerable position. With lower interest rates it’s not so urgent, but you’re facing a big risk if you hang onto your home and rates start to rise or the market changes. You might anticipate selling for a certain amount and then not get the price you want which will affect the capital and income you can expect to draw on in retirement. And if interest rates go up, you’ll have higher mortgage repayments and that can limit your cash flow.
If you’re looking at ways to finance aged care, is selling your home the best option?
If you’re single and moving into an aged care facility, you’re going to need funds for your lump sum RAD (Refundable Accommodation Bond) or the equivalent periodic DAP (Daily Accommodation Payment.) For many, selling their home can be the only way to finance these payments. And your home is included in your assets test and can affect government contributions towards your aged care costs. You might consider renting the home out to pay for aged care, particularly if you want to keep it as part of your estate for family to inherit. But in a lot of cases, it’s family members who take responsibility for managing and maintaining the property and this can put unwanted pressure on their time when they’re busy with work and family life.
With couples where one needs aged care and the other doesn’t, their home is exempt from the asset test if the spouse continues to live there. But even in these cases, it’s a good idea to think through all the options. When one of my clients was making arrangements for her husband to move into an aged care facility, she decided to downsize to save her from having the burden of the house to look after. And although the proceeds from the sale will affect her pension entitlement and aged care subsidy under the assets test, the money she and her husband have left over will act as a savings buffer, giving them peace of mind and a sense of security.
How can a financial planner help you make the right decision about when to sell?
When your home is your chief asset and you need to sell to fund your retirement, a planner can bring an impartial perspective to the process and help you look at the numbers. Let’s say you have a large home in the outer suburbs and you plan to downsize to a two-bedroom unit closer to the city. You need to look at the real value of your home, the price you can expect to pay for your new property and how much it’s actually going to cost you to buy and sell. Sometimes you’ll do the sums and discover you won’t actually come out with much left over. It can help to have someone guide you on what you can afford, so you can avoid making a costly mistake and ensure you have a lump sum that’s enough to generate a comfortable income for the rest of your retirement years.
A CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on planning for your accommodation and income needs in retirement so you can look forward to a comfortable lifestyle after leaving work.
Online source: Produced by The Financial Financial Planning Association of Australia and published on 25 May 2017. Original article.