Many older Australians eventually consider downsizing the family home for a range of reasons, which sounds simple enough. But scratch the surface and you uncover a laundry list of emotional and financial challenges.
In a perfect world, selling your home in retirement and moving to an apartment or smaller house would simplify your life, while topping up your retirement savings. Yet there is so much more to the decision than money, and despite recent government incentives to encourage more retirees to downsize from homes that no longer meet their needs, the majority would prefer to ‘age in place’. This is hardly surprising, because your property represents a reassuring constant in a world of change.
According to the Productivity Commission’s report, Housing Decisions of Older Australians, 76 per cent of Australians aged over 60 see their home as a place to ‘see out their retirement’, 71 per cent view the home as a ‘safety net’, while 44 per cent would like to see their property passed on to their children.
Meanwhile, research by the Australian Housing and Urban Research Institute, Downsizing amongst older Australians, found the five most common motivations to downsize include lifestyle preference, an inability to maintain the house and garden, children leaving home, retirement and health and disability.
It’s telling that just 10 per cent of those surveyed cited financial gain as their motivation for seeking a smaller dwelling, while 6 per cent pointed to financial difficulties as the driver of their decision. This rings true in my experience working with families considering selling up in retirement. The psychological and emotional adjustment can be more daunting than making the numbers stack up.
The purchase of the house decades earlier was often the culmination of years of toil and sacrifice, perhaps funded by working multiple jobs, and the relentless savings discipline needed to get a deposit together. The goal was attainment of the Great Australian Dream – an aspirational, if dated concept, equating home ownership with achievement and identity. By saying goodbye to the family home many years later, the act of downsizing can be a jarring end to the dream.
Ours is a property culture driven by a ‘bigger is better’ mantra, and the decision to sell your home later in life is made harder by the reality that Australian freestanding houses are among the largest in the world.
According to the Australian Bureau of Statistics, the average new freestanding house built in Australia in the 2017-18 financial year was 231m2, second only to the United States, where super-sized dwellings are the norm. While we may have moved on from ‘peak McMansion’ in 2011-12, when the average house size topped out at 245m2, the 2018 Commsec Home Size Trends Report confirms that properties built in Australia today are some 30 per cent bigger than they were in the 1980s.
This means that for many people in retirement, the adjustment to an apartment or another, much smaller property is both an emotional rollercoaster ride, and a logistical nightmare requiring an almighty garage sale and a crash course in the art of decluttering! Marie Kondo’s New York Times bestseller, The Life-Changing Magic of Tidying Up, should be essential reading for the intrepid Aussie downsizer!
Thinking through the benefits and drawbacks of downsizing will allow you to go into the process with realistic expectations, however.
Positives include less household maintenance, closer proximity to infrastructure and amenities, the possibility of increased retirement savings and the convenience of being able to lock up and leave when you’re going travelling. These benefits should be weighed against the practical realities of leaving your community and joining another, living in a smaller space, reduced ability to host as many visitors and uncertainty about your future income if your Age Pension reduces.
One of the inevitabilities of longer lifespans is that retirement costs a lot more than it used to. There can be an uncomfortable conflict between the financial reality of living longer and the emotional desire to remain in your home for as long as possible. The way Centrelink exempts the family home for the Age Pension assets test can also skew behaviour by encouraging people to hold on to a valuable property when, for lifestyle or health reasons, they would prefer to downsize.
While it is often possible to downsize and structure your finances so you generate a higher level of ongoing income (even after any reduction in Age Pension payments), achieving this in the current interest rate environment depends heavily on how you invest the sale proceeds and the return you receive on those funds.
Downsizing also raises the deeper question of what matters more in retirement?
The answer differs for everyone, but a common dilemma is managing the tension between your desire to maximise enjoyment now, and the need (real or perceived) to save for a rainy day – either to give you more flexibility to meet unexpected expenses down the track or perhaps to leave a greater legacy to your children.
The decision as to whether or not you SKI (spend the kids’ inheritance) may be taken out of your hands, though, if you need to sell the family home and live on the residual proceeds during the remainder of your retirement. While more than 40 per cent of older Australians would like to see their property passed on to their children, in an era of substantially longer lives, it is increasingly likely that the property in question will be a smaller one, rather than the family home.
In the next article in this series, I’ll explore the many financial considerations of downsizing, including options for investing residual sale proceeds, understanding Centrelink impacts, quantifying the costs of buying and selling and navigating the new downsizer superannuation contribution rules, so stay tuned!