If you’re pinning your financial hopes on the ability to downsize your home in retirement, you may need to think twice.
Many Australians don’t have enough in super to fund a quality retirement, but if you’re pinning your hopes on the value of the family home, it could pay to think again. Downsizing to a smaller place may not be a quick-fix solution for having insufficient super savings.
I’ve come across research showing one in three people think they’ll sell the family home – often their largest asset, to see them through their later years.
Downsizing is good in theory, and under new rules announced in the Federal Budget, from 1 July 2018 home owners aged 65 and over will be able to contribute up to $300,000 to super from the proceeds of selling their home.
This sort of contribution won’t count towards the before-tax or after-tax super contribution limits. The key test is that you must have owned your home for the past ten or more years.
Despite this new initiative, downsizing is not always the answer.
Firstly, do you really want to find yourself at retirement with no option but to sell a home you’re perfectly happy living in?
And after you’ve sold and put aside some proceeds into super or whatever investment you choose, you could be faced with taking a substantial downgrade in the type of housing or location you can afford.
A study by National Seniors Australia found that while the idea of downsizing can appeal to retirees, many still want to live close to transport and amenities, have a small garden and the opportunity to own a pet. There may not be many such options available, and the same research found that even if seniors can find an affordable alternative, the personal and financial ramifications of downsizingcan be a significant deterrent.
Many respondents to the survey said they didn’t know where to begin, that the process was too confusing, and that it simply wasn’t worth the cost and upheaval of downsizing.
Add to this the potential for baby boomers to still have adult kids living at home, and it’s easy to understand why many are staying in their bigger homes longer than they planned to.
This highlights how, while it works for some, downsizing your home can be an unreliable strategy for retirement funding.
If you’re pinning your financial hopes on downsizing, be sure to plan early – certainly in pre-retirement. Take a look at the market to see what properties appeal to you, check out the pricing, and be realistic about what your house might sell for.
For those of us still in the workforce, a strategy of steadily adding to your super may be more of a sure-thing to pay for a decent retirement. It could also be the clincher that lets you enjoy your family home for longer.
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Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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