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Top 5 Pre-Retirement Strategies – Strategy 5 – Plan To Downsize The Family Home

Our final strategy, strategy 5, of our Top 5 Pre Retirement Strategies eBook is in regards to downsizing the family home. The following is an excerpt from our eBook.

For most people I meet, their family home is their biggest financial asset. It’s the Australian dream after all, to own our own home, and that combined with the other financial drivers of property values, like:

  • Significant concentration of population and therefore demand in Australia’s capital cities;
  • Steady influx of skilled immigrants seeking the same sort of security a home can bring for their families;
  • Overseas interest in our property market for investment;
  • A steadily decreasing interest rate over the past 30 odd years; and
  • Low unemployment
run the numbers to plan to downsize the family home

The property market has grown in value for most people very nicely.

You may have enjoyed riding the property wave too and if you have a family, you likely have a home that is bigger and potentially more valuable than you will need in your retirement. It’s because of this, that downsizing to help achieve your retirement objectives can be a great strategy.

Why this is a good option

When you think about your life financially, you should be able to reflect on a life of financial compromises and one of the biggest compromises we make as home owners, is the amount of capital and cashflow we tie up into the roof over our heads.

While you are working, this is not as big a concern, because you are earning an income that is independent of your asset base. But when you reach retirement, your assets are what you will be looking towards to provide your lifestyle income for the rest of your life! I know this is scary to think about, but

“The biggest financial goal we all share, is to have a lump sum big enough to retire on”

and what I coach my clients on, is to view their entire asset base, including their home as part of this picture. A home is a lot more than just shelter of course, as it also offers amongst other things:

  1. A sense of security;
  2. Future financial options like a pool of money to fund age care down the road;
  3. And it is an expression of you.

Each of these aspects of home ownership have a value, but the trick is to balance this with the lifestyle you value. You can’t take money with you after all, so balancing out your spending needs with your living needs, is a fundamental part of good retirement planning and is also a fundamental reason why having a plan to downsize the family home can be a good option.

family at the beach with a plan to downsize the family home

To help you understand this better, it’s worth looking at it in the context of what you are eligible to from the government in the form of an Age Pension. At the time of writing the maximums for singles and couple home owners are:

Per fortnight Single Couple each Couple combined Couple apart due to ill health
Maximum basic rate $808.30 $609.30 $1,218.60 $808.30
Maximum Pension Supplement $65.90 $49.70 $99.40 $65.90
Energy Supplement $14.10 $10.60 $21.20 $14.10
TOTAL Fortnightly $888.30 $669.60 $1,339.20 $888.30
TOTAL Annually $23,095.80 $17,409.60 $34,819.20 $23,095.80

Now if you can see this level of income being sufficient to provide for all of your retirement income needs, then having a plan to downsize the family home strategy may not be something you need to contemplate, however if your need is greater than this, then having a plan to downsize the family home can supplement things.

For the purpose of this strategy, I am not going to go into the full ins and outs of how the Age Pension works, but for illustration I’ll touch on some of the basics.

First of all, for a couple you are allowed some financial assets of between $277,000 – $375,000 before your pension entitlement is even affected and you can still have up to $821,500 before your pension cuts out completely.

To illustrate this, we’ll look at some examples that shows how Age Pension can be supplemented by your own investment:

No Age Pension Reduction Example A Example B
Couple Single Couple Single Couple Single
Assets 277,000 157,000 550,000 275,000 700,000 350,000
Investment Earnings 16,620 9,420 33,000 16,500 42,000 21,000
Age Pension 34,819 23,096 30,752 21,431 28,314 20,212
Total Annual Income 51,439 32,516 63,752 37,931 70,314 41,212

What this shows is that you can achieve a far better income in retirement if you are able to supplement your Age Pension entitlement with your own investment. It stands to reason therefore that having a plan to downsize the family home strategy can make sense, if you end up with a home that serves your purpose and also frees up capital for investment in your lifestyle.

Recognising that property prices have grown exponentially to the point that most retirees homes are in fact their biggest financial asset, there is now legislation that allows you to downsize your home and contribute up to $300,000 per member of a couple from the proceeds tax free and without impacting the other contribution limits. This provides a massive incentive to super charge your retirement savings for the benefit of your retirement.

new home plan to downsize the family home What this also means is that even if you do not need to downsize to achieve your retirement income needs, you may still choose to do so, because of the additional flexibility it provides to your retirement lifestyle. For example, it might mean you can buy the boat you’ve always wanted OR do the big world travel you’ve always dreamed of, but have, to date, been unsure you can afford.

Alternatively, consider this – as your primary residence is exempt from Centrelink calculations, you could have a multi-million-dollar property with not another cent to your name. In this case, you would be eligible to the $34,819 p.a. Age Pension as a couple home owner.

If you were to downsize and made available $550,000 from the total process, you could contribute this 50/50 to both of you, and per our second table, increase your potential retirement income to $63,752. That’s an increase of close to double!!

Let’s also not forget to consider that as you get older, it may become more difficult to manage in your existing home, so performing a downsize strategy while you’re still fit and able, along with providing you a financial benefit, may also help you down the track from a lifestyle perspective as well.

So, when you think forward to how your needs are changing or likely to change as you contemplate retirement, what does it look like for you? If you are in a big family house currently, then try and imagine when your kids are no longer with you. You may feel happier in a smaller home for example or moving out of the city like my wife and I may end up doing.

It’s due to these changing needs, that a downsize may be appropriate for you.

A downsizing strategy is usually best suited to you if you have less funds than you need to achieve the retirement lifestyle that you want, however due to proposed government legislation, it can be a strategy that is right for almost everyone.

One final point of note, the downsizing legislation actually opens new opportunities to home owners that want to sell their principal place of residence, but don’t necessarily need to downsize. It can be a great way to get money into super after you are 65, even if you do a sideways move or even upgrade in the property market. This is something we’d be happy to discuss with you, if it sounds like you!

What scenario and risk profile/person does this make sense for?

This strategy is suitable for everyone to consider, because what you buy as a home is an entirely personal thing. What I mean by this is, the only person who can measure whether your replacement asset is going to be a comfortable lifestyle alternative is you.

which property downsize the family home

But in order to make it a financially worthwhile process, it is important you crunch the numbers, factoring in:

1. Sale costs – including agent fees and marketing costs for sale etc.
2. Purchase costs of a new home – including stamp duty, building inspections and conveyancing etc.
3. Your capital redemption amount – Being the amount of money you want to achieve from the downsize, to put towards your retirement

Keep in mind, that smaller does not necessarily equal cheaper. Especially if your motivation is to move closer to the city, so it’s important to do your homework and determine what compromises you are prepared to make, by determining what is more important to you, in line with your list.

If you’ve been reading our blog edition of our Top 5 Pre-Retirement Strategies eBook, then we hope you’ve been able to take away a lot to think about. If you are interested in discussing your plan, please don’t hesitate to contact us – we always welcome the opportunity to become a part of your life journey.

As mentioned at the start of this blog, if you would like to download our Top 5 Pre-Retirement Strategies, you can do so below:

Free: Top 5 Pre-Retirement Strategies

About Yield™ - Financial Planner Melbourne

Who we serve – We help time poor professionals and business owners who intuitively know they should be doing more to improve their financial position and are seeking an expert to guide them on financial planning strategies. Our clients want personalised financial planning advice and to feel empowered and confident that they can achieve a secure transition to retirement.

What we do – We gain a deep understanding of your current financial position and preferences, what you value and want to achieve. We then help you develop a highly personalised financial plan, to show you how to make your money work harder for you. Ongoing we regularly monitor and measure progress against your plan projections, to show you how you’re tracking and help you manage change to your advantage.

How we do it – We apply our proven expertise in investment markets (Shares & Property), Tax and Debt structuring, Retirement Planning, Risk management and Estate planning, to help you reorganise the way you use your money to achieve your desired outcomes.

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