Do you love where you live? Most people do.
In fact, research shows a majority of retirees and near-retirees have a strong desire to remain living in their own home for as long as possible – and they’re doing just that. The 2016 census that 99 percent of people aged 67-74 lived in a private dwelling, and even in the 85-plus age group, three-quarters of Aussies still lived at home.
There are perfectly sensible reasons for this choice; the security and comforting familiarity of your own bricks-and-mortar, the life you’ve established in your neighbourhood and the importance of staying close to friends and support networks are just some of them.
Then, there are the financial benefits, such as the ability to use some of the equity in your home to lend or gift money to your children or the potential to leave your home as a tax-free inheritance.
But sometimes, having a mortgage-free home in a place you love to live isn’t enough to ensure a worry-free retirement. The Age Pension provides a basic income but Australians are living increasingly long and healthy lives and if your superannuation balance isn’t substantial or your lifestyle aspirations are more ambitious than a basic existence, your home equity (for those who are eligible) may be necessary to help fund your retirement.
This is where the conversation usually turns to what’s commonly called downsizing – the idea that selling your large or valuable family home and purchasing a smaller or cheaper property can free up money to be used to increase your retirement income.
There are several common downsized housing options for 60-pluses, from taking a tree- or sea-change in a lower-cost location to doing the grey nomad thing, building a granny flat, choosing one of the thousands of inner-city apartments springing up or heading for a retirement village.
And there’s no shortage of encouragement for older Australians to downsize. The current federal government, for one, is keen that you do. The 2017-18 budget included a relaxation of the limits on superannuation contributions for 65-pluses who wished to sell their family home and contribute some of the proceeds to their super account.
The relaxed limits would, then-treasurer Scott Morrison said at the time, remove a barrier for older Australians who wanted to contribute more to super but had hit the non-concessional contribution cap or the $1.6 million balance threshold, while also freeing up larger homes for younger, growing families.
But downsizing isn’t as easy as deciding you’d like a bigger income and whacking a for sale sign on the front lawn. For many Australians, property is loaded with emotional ties, closely held beliefs and financial implications, that must be weighed against the potential benefits if you’re going to be happy with your decision to downsize.
Brian Herd, a partner at CRH Law, calls the decision a “clash of the titans of later life” that, even when the numbers stack up favourably, isn’t easy to settle because of what their ‘castle’ means to most Aussies.
If your beloved home represents years of hard yakka and financial discipline, and feels like a true representation of you, letting it go isn’t easy; after all, the great Australian dream has so long been to own a patch of land, surrounded by a picket fence. And there can also be unspoken pressure from your family to hold on to it.
“Moving from your home of many years can be a clash of the titans of later life – your heart and your head – your head says move, your heart says stay,” Herd notes. “Some say it is a cleavage between preserving your memories or facing your realities. Some older people even think they should also consider their children’s hearts, those children who want the family home kept to go home to (or inherit), both for themselves and their children.”
The difficulty of letting go of memories is familiar to many Starts at 60 readers. Community blogger Carole Leskin wrote in March 2018 of how she’s clinging tenaciously to the items in her home she cherishes, even as she acknowledges that she needs to move to a dwelling that’s easier to maintain.
“Each item is a memory. Every task that has become a lifelong habit gives me pleasure,” she wrote of bringing down her winter linens from the top of the closet for what may be the last time. “This year, it has also made me incredibly sad as I begin to come to terms with the fact that I will have to move soon – sooner than I thought.”
Meanwhile, there’s our fervent belief in property as an asset, as Bryan Ashenden, the head of financial literacy and advocacy at BT, points out. But he adds that it’s important to remember that that belief can sometimes be misguided.
“Australians love property – you can see it, you can touch it, you can look at it, and you always think that property’s always going to go up,” he says. “But there’s enough evidence in recent times to suggest property markets are going backwards. That doesn’t mean it’s the right time to sell. But the recent experience shows that property does not always go up in value – it can definitely go backwards.”
The trouble is, doldrums in the property market can add to what’s already a fraught decision. If there’s a fine line in your particular case between benefitting financially from downsizing or not, a drop in the value of your property can have a big impact on the choice you make. And, as Starts at 60 Money Club member Linda Gibson found, downsizing isn’t always cheaper – it depends very much on your downsizing destination.
“Over the past 10 years, we’ve looked into retirement villages and visited quite a number,” she said. “Recently, we looked at a village close to our area that seemed to be the place we needed, but after other viewings and doing the most crucial thing, the financial number crunching, we realised we would be giving up a great deal of independence without much monetary gain at all.”
Rachel Lane, the founder and principal of Aged Care Gurus, a consultancy that advises older Australians on their residential choices in later life, says that this number crunching is vital if a retirement village is one of the downsized options you’re considering. She suggests a simple way of working out whether it’s the right choice.
“One of the biggest mistakes people make when they are comparing one retirement community with another is to just look at the purchase price – the conclusion? The one that’s lower is more affordable. Big mistake!“ Lane explains.
“There’s a simple method I use for breaking down retirement community costs. You take a blank piece of paper and divide it into thirds. In the top box you write ‘ingoing’, in the middle ‘ongoing’ and in the bottom ‘outgoing’. If you are comparing two villages, then draw a line down the middle of the page and you can compare side-by-side.
“What you will find is that they will have different costs in each box, different impacts on your pension entitlement and eligibility for rent assistance and possibly the biggest difference will be in the amount you get back after you leave. Viewed side by side, the differences of one over another may not be tens of thousands but hundreds of thousands of dollars. So, crunch the numbers!”
It’s this impact on their Age Pension entitlement that deters many people from downsizing. That’s because an increased income from a downsizing-boosted super balance or even holding the cash from the sale in the bank will likely impact how much pension you receive – an impact that veteran financial commentator Noel Whittaker puts in stark terms.
“When people downsize physically, they normally downsize financially too; they pay less for their new house than they get for their old one. This can be great for putting some extra money in your investments or buying a new car, boat or caravan,” he says. “But if you’re a pensioner, you need to be careful of going too far. The asset test for the pension is essentially a negative 7.8 percent return – for every $100,000 you go over the asset test limit, you lose $7,800 a year of pension, so make sure you know how your move will affect it.”
The Australian Securities and Investments Commission’s MoneySmart site advises anyone considering downsizing to consult a financial adviser on the pension and taxation implications before selling up due to the complexity of some of the calculations required.
MoneySmart also offers a few potential alternatives to selling your home to create additional income. It says that converting your home to dual occupancy so you can live in one half and rent the other, renting out some rooms or looking into reverse mortgages are options with exploring, though they too may have pension or tax impacts.
There are, of course, plenty of 60-pluses who crunch the numbers and decide that downsizing is the right decision for them. One of them is Starts at 60 blogger Ann Rolfe, who wrote last year that that her impending move from her three-level family home to a smaller residence in a lifestyle village would help make up for her low super balance. She emphasised the level of thought that had gone into her choice.
“This is the biggest decision of my life,” she wrote. “Because it affects the rest of my life.”
Lawyer Brian Herd recommends going even one step further, though, by thinking about where you will move after you’ve downsized. “If your decision is to move, then, at the same time, have an exit strategy for where your next move will be, after the first move,” he says.
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