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Downsizing in retirement

28 Aug 2024

As people move into senior years, many will be contemplating a significant decision: whether to downsize the family home. The process of moving to a smaller, more manageable property is not just about reducing living space; it offers a range of benefits that can significantly impact your retirement years. However, there are also several financial factors that must be considered, particularly in today’s upward property market.

Pros

  • Unlocking equity – One of the most compelling financial reasons for downsizing is the opportunity to unlock home equity. For many, the family home represents the largest asset they own. By selling a larger property and purchasing a smaller one, or even renting, you can release a substantial amount of equity. This released capital can be reinvested, creating a financial cushion for unexpected expenses or boosting retirement savings.
  • Reducing ongoing expenses – Maintaining a large home can be expensive. Higher utility bills, property taxes, insurances and maintenance costs add up, placing a strain on a fixed retirement income. Downsizing to a smaller property with lower upkeep requirements can significantly reduce these ongoing expenses.
  • The simple life – Beyond the financial advantages, downsizing can simplify life in retirement. A smaller home generally means less cleaning and maintenance, freeing up time for leisure activities and hobbies. Moving to a well-designed retirement community or a home with accessible features can also enhance quality of life. These communities often offer amenities such as social activities, healthcare services, and safety features tailored for older adults.
  • Opening investment opportunities – Downsizing also opens doors to new investment opportunities. With the funds freed from selling a larger property, you can explore diverse investment options such as managed funds, shares, or term deposits. These investments can provide a steady income stream or grow wealth over time, supporting a comfortable and secure retirement.

Considerations

  • Finding a suitable property – To downsize to a smaller property and generate enough cash to make the process worthwhile, the target is to move into a residence priced at 70% of the value of your present home. A major concern in the current property market is whether you can actually find attractive accommodation at 70% of your sale value in the same general area as your existing property.
  • Costs of selling and buying – The costs of selling and buying in Australian capital cities can be significant. Based on selling a $1.5 million property (Sydney and Melbourne) and a $1 million property (other capital cities) and buying a $1.05 million property (Sydney and Melbourne) and a $700,000 property (other capital cities) costs are estimated at anywhere between $55,000 and $90,000. 
  • Impact on Age Pension or government benefits – Selling your home when you retire may affect any income support payments you receive, including the Age Pension. Your eligibility for the Age Pension depends on the assets test (value of your assets) and income test (income you receive). Your principal home is not included in the assets test. As of 1 January 2023, when you sell your home, the proceeds are exempt for up to 24 months if you plan to use them to buy, build or renovate another home. Depending on your circumstances, you could get a further exemption of up to 12 months. The maximum assets test exemption period is 36 months. Sale proceeds to be used to secure a new principal home will be deemed at the lower rate only. Any extra sale proceeds held in a financial asset will be subject to the regular deeming rates.

Get independent advice

Before you downsize it is important to consult a legal professional to review sale contracts and oversee settlement.

Get independent advice from a financial adviser about options for investing your sale proceeds and ask the Services Australia Financial Information Service how it will affect your pension or government benefits.