Downsizing in retirement
Decide whether downsizing your home is right for you.
If you’re thinking about selling your home and downsizing, consider the pros and cons. Check if selling your home affects your government benefits.
Consider the costs and your needs before you downsize
Take time to consider your needs. Make sure your new home suits your lifestyle, budget and level of independence. Some of the costs to consider include:
- buying and selling in the same market
- real estate agent fees
- stamp duty
- legal fees
- furniture removal.
See ASIC Moneysmart website’s “buying a house” article for more information.
Pros and cons of downsizing your home
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 get used to new surroundings.
- Emotional connection — Your family home may be full of memories, which can make it difficult to let go.
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.
Impact on Age Pension or government benefits
Your eligibility for the Age Pension depends on the:
- assets test (value of your assets)
- income test (income you receive)
Your home is not included in the assets test. When you sell your home, the proceeds are exempt for up to 12 months if you plan to use them to buy, build or renovate another home.
The proceeds are ‘deemed’ in the income test — they are assessed as income from financial assets. This may affect the amount of government benefits you get.
See ASIC Moneysmart website’s “Age Pension and government benefits” article for more information.
What to do after you downsize
After you’ve sold your home:
- Try renting for a while — If you’re having trouble deciding where to live, rent in a new area to see how you like it.
- Invest the proceeds — Consider investing any extra money into an income-producing asset. See ASIC Moneysmart website’s “how to invest” article to explore your options.
- 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. See ASIC Moneysmart website’s “aged care” article for more options.
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 Department of Human Services Financial Information Service how it will affect your pension or government benefits.
CASE STUDY
Mary sells the family home
Mary is 67, owns her home, and is considering downsizing. She expects to sell her home for $800,000. She wants to buy a small apartment for $500,000 and have $300,000 left to invest.
Before selling, she contacts Centrelink (Department of Human Services) to ask how it will affect her Age Pension. A Financial Information Service officer tells her the $300,000 will be included in the pension assets test. This will reduce her pension by a small amount each fortnight.
Mary decides to go ahead with downsizing because, even though she’ll get less pension, she’ll be more financially secure.
Source:
*General Advice Warning*
In this article we have not taken into account any particular person’s objectives, financial situation or needs. You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.
