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Aaron Alston

Downsizing in Retirement

Written by Aaron Alston

This article addresses downsizing in retirement and the implications.  If you are thinking of selling your home and are either retired or considering retirement this article is for you.

Pros and cons of downsizing your home

Sourced from https://moneysmart.gov.au/retirement-income/downsizing-in-retirement

Weigh up the pros and cons to decide if downsizing is right for you.

Pros

  • Increased cash flow — Downsizing could free up money to pay off your mortgage, invest or spend.
  • Easier to maintain — A smaller place takes less effort to clean and maintain.
  • More convenient — You can choose a layout and fittings that better meet your needs, or a location closer to family, transport and services.
  • Lower insurance and utility bills — In general, a smaller home costs less to insure and is cheaper to heat or cool.

Cons

  • Less space — A smaller place means less space for things, so you may have to make some hard choices.
  • Less flexibility — Your new place may have less privacy, fewer guest rooms, or less space for entertaining.
  • New neighbourhood — It may take time to adjust to a new area or to find new health care and other professional services.
  • Emotional connection — Your family home may be full of memories, which can make it difficult to let go.

Impact on Age Pension

  • Your eligibility for the Age Pension will depend on the assets test and income test.
  • Your home is not included in the assets test. When you sell your home, the proceeds may be exempt for up to 12 months, however the proceeds will be assessed under the income test.  This could have a dramatic impact on current or future aged pension entitlements.
  • If you are currently receiving an aged pension, you must consider the potential impact because you may lose up to $7 800 p/a in pension every year for every $100 000 converted from your non-assessable home to assessable financial investments.

Case Study

Mary is aged 70 and widowed.  She owns her home, has $350 000 in superannuation, $100 000 in cash and personal effects and is considering downsizing.  Mary is currently receiving a part age pension.

Mary expects to sell her home worth $800 000 and downsize to an apartment for $650 000, leaving $100 000 after costs.  As Mary has reached pensionable age, all her financial assets are assessable, whether they are held inside or outside the superannuation environment.

Mary would be converting part of a non-assessable asset, the family home, into an assessable asset, cash.  As a result, her total assessable assets would increase, and her aged pension would reduce.  Mary must decide if selling her home and having an extra $100 000 outweighs the loss in pension entitlements.

The next sections are from sourced from https://moneysmart.gov.au/retirement-income/downsizing-in-retirement

Consider the costs and your needs before you downsize

Take the time to consider the kind of home that suits your lifestyle, level of independence and budget in retirement.

If you decide to move, some of the costs to consider include:

  • buying and selling in the same market
  • real estate agent fees
  • stamp duty
  • legal fees
  • furniture removal

Alternatives to downsizing your home

If you decide to stay in your home, alternatives to downsizing include:

  • Renting out space — Consider renting out a room or taking in a boarder.
  • Converting to dual occupancy — See if you can convert your home so that you live in one half and rent or sell the other half.
  • Considering equity release — Explore whether a reverse mortgage or home reversion may suit. There is risk involved and a long-term financial impact, so get independent financial advice first.

Before going ahead with any of these options, check the tax impact and whether it will affect your government benefits.

What to do after you downsize

After you’ve sold your home:

  • Invest the proceeds — Consider investing any extra money into an income-producing asset  Your financial assets will be treated the exact same way under the income test irrespective if your money is held in savings, superannuation, or managed funds.

From 1 July 2023 the deeming rates are as follows:

For Singles – 0.25% on the first $60 400 and 2.25% on the balance.

For Couples – 0.25% on the first $100 200 and 2.25% on the balance.

Note – You may be able contribute up to $300 000 from the sale of your home to super.

  • Get help if you need it— Government services like the Commonwealth Home Support Programme can help you to live independently and assist with daily tasks like shopping, cleaning, personal care or home maintenance.

Get independent advice before you go ahead

Before you downsize:

  • 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.
  • Ask the Services Australia Financial Information Service how it will affect your pension or government benefits.

Summary

  • Calculate all costs associated with selling and buying a new place and the emotional factors involved in moving.
  • Consider the potential impacts to your aged pension and alternatives to downsizing (if applicable).
  • Seek professional advice and once you have downsized, consider your next steps.
  • Most importantly, where you live, and your social network will have a massive influence on your health and overall happiness in retirement.

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