A Guide To Downsizing For Retirement

What Is Downsizing?

Downsizing is the process of selling your home to move into a smaller or lesser-valued home.

What To Consider Before Downsizing A House

The pros of downsizing

• You free up the equity in your current home.
  • The equity can be used to contribute to your superannuation for retirement if you are eligible – or to purchase another property.
• You can stop cleaning and maintaining a home that is bigger than you need.
  • Downsizing lets you get rid of all that space that perhaps you don’t need anymore, once the children have moved
• Live closer to your friends and family.
  • As you get closer to the city, homes are more expensive. You may decide to get a smaller flat or house just to be closer to your loved ones.
• Lower maintenance and upkeep costs.
  • Taking care of a big house can be a chore – an expensive one. You can save time, money and effort by moving to a smaller home.
• Cheaper cost of living.
  • Day-to-day running costs, like household shopping utility bills, tax and insurance, will generally be less expensive in a smaller home.
• Simplified living.
  • With less space, there will be less clutter and less cleaning to do, leading to a more minimalistic and stress-free lifestyle.
• You can move to your ideal location.
  • If you are looking to downsize after retiring, you now have the option to look for a place away from the city or suburbs where you had to stay for your job’s sake and move to more relaxing places, for example, near a beach or near nature.
• You can repay debts or have smaller home loans.
  • For some, the high-interest rates and home loan may be too much for them to pay back, so they may look to downsize to a smaller house and reduce their debt.
• Increased financial cushion
  • Some expenses in life are big, like healthcare, wedding or college fees, if you wish to fund it for your child. Downsizing will allow for the surplus from the sale to be used for any major life expenses that you may encounter.
• Reduced carbon footprints.
  • Some people look for more environmentally friendly ways in their lifestyle and opt to downsize if such space is not required by them. A smaller home will generally require lesser resources and less energy to power.

The cons of downsizing

• Huge cost of selling the house
  • People have to keep in mind the cost of selling the house instead of just looking at the equity gained on it. The costs associated with the selling of the house are the agent fees, the promotional and marketing costs, and the legal fees. If they intend to purchase a new house, they’ll have to take into consideration the stamp duty, legal fee and mortgage fees.
• It can be hard to find a property you want for your new home.
  • Finding the type of property that you are interested in, be it for renting or buying, can be a very difficult and time-consuming process. It can be a while before you find the one you want.
• Having to adapt to changes
  • Downsizing can require adjusting to a different living situation, which can be especially challenging for those who had lived in their old home for a very long time. On top of a new smaller space, you’ll also have to make new friends and connections.
• Clearing out sentimental possessions
  • With less space in the new house, old possessions have to be thrown away or sold. This can be emotionally draining and very time-consuming.
• Space constraints
  • Downsizing means giving up spaces like free rooms, which can be inconvenient when guests come over or you need an office or a project room.

Can You Add Downsizer Contributions To Your Super For Retirement?

If you are 55 years old or older, you can put up to $300,000 – or $600,000 for couples – into your superannuation funds from the sale of the house.

The following condiitions have to be met:

• The house has to be owned by you or your spouse for at least 10 years before the sale.
• The house must be your primary place of residence and fully or partially exempt from the capital gains tax.
• The house has to be in Australia.
• The house must not be a caravan, houseboat or other mobile home.
• You must not have made a downsizer contribution to super before.

You have to fill in the downsizer contribution into the super form and give it to your super fund before you make the downsizer contribution. The downsizer contribution must be made within 90 days of receiving the sale proceeds.

Pros and Cons of Downsizing Contributions To Your Super

The pros:

• You are adding money into a tax-effective superannuation fund.
• There are no requirements to purchase a new home.
• Increased retirement savings and a more secure future.
• There is no upper age limit and no work test for a downsizer contribution.
• A downsizer contribution is exempt from contribution caps. So, even if your total super balance is 1.7 million, which is the maximum, you can still add the downsizer contribution to super.

The cons:

• It may impact your aged pension eligibility.
• It is not tax-deductible.
• You can make only one downsizer contribution in your lifetime.

When Should You Downsize Your House?

Whilst most downsizers are over the age of 65, you don’t necessarily have to wait until you retire to downsize. Now, more people are predicted to be in mortgage stress as the interest rates rise. Downsizing is one way to get financial relief. However, it is very important to calculate the additional cost of buying and selling a house so that you are aware of the amount that will come to you.

Below are some signs that it’s time to downsize:

1. You have space in your house that you do not use.

2. The rising of interest rates is taking a toll on your financial stability.

3. Paying for your home expenses leaves very little cash left over for saving or for doing what you want to do.

4. Your house isn’t practical for your needs anymore.

5. Maintenance is taking too much of your time and money.

6. The house will not be suitable when you grow older. For example, climbing up stairs may be an issue in the future.

Common Downsizing Mistakes You Want To Avoid

Some people downsize their homes without thinking it through and find themselves in a pinch later. Here are some common mistakes to avoid.

1. Not having a plan.

This could be a grave error. Before deciding on downsizing, pick what kind of lifestyle you would like and decide whether you would like to rent or buy a new home. Plan in advance how much time and money would be required for the whole process. Failure to plan well could result in you squandering the money from the sale.

2. Not considering your future needs and wants.

Failure to allocate resources for future expenditures will leave you in financial distress in the future. If there is a surplus from the sale, it could go into investment plans. Plan with your financial adviser so that you will be able to support yourself in the future.

3. Not knowing beforehand all the costs associated with downsizing.

This ensures that you are not shocked at how much comes into your hands from the sale after expenses, and you can budget for fees that can come up in the future, like medical costs, condo fees, and an increased cost of living.

4. Storing things you don’t need.

You may rent a storage unit for your things when you downsize. Renting, on average, costs between $250 and $500 each month, which is not cheap. Throw away or sell those things that you do not need.

5. Bringing your old furniture that doesn’t fit into the new house.

It is important to measure your new space before moving in. Your furniture from the bigger house may not fit in the new space. This would be a waste of effort, time and money if you used a moving service. It would be ideal if you could donate or sell it before moving into the new place and plan how to maximise a smaller space beforehand.

6. Not considering the emotional impact of downsizing.

It may be difficult to adjust to a new lifestyle and a new environment. You can have a trial period by renting the place you’d like to move to and adjust to the change gradually.

7. Not seeking professional help.

It would be wise to get help from agents like real estate agents and financial advisors so that you can be fully prepared for the process. They provide the expertise that could prove to be valuable to you.

Final Thoughts

The downsizer contribution to the superannuation fund is a tool provided by the government to help older citizens have some funds for old age. However, you should consider all the costs of purchasing a house or the cost of renting. There are hidden costs that you may not have thought about when you considered downsizing. Have a plan for what you want to do in advance, and talk to your financial advisers and conveyancer before making the big decision.

Need A Home Loan?

We can help you get a bridging loan if you are looking to buy a property while selling your home. We also have lenders in our panel who lend to people over 50. Call us on 1300 889 743 or fill in our free online assessment form, and we will contact you.