Downsizing Your Home in Retirement
Could your family home help create a stronger retirement?
For many Australians, the family home is one of the biggest assets they will ever own.
But as retirement gets closer, the house that suited your family for the last 20 or 30 years may no longer suit the life you want to live next.
The kids may have moved out. You might want less maintenance. You might want to live closer to family, the coast or somewhere that better suits your retirement lifestyle. Or you may simply be looking at the value tied up in your home and wondering:
Could we be using some of this money to create a better retirement?
This is where downsizing can become much more than a property decision.
It can become part of your retirement strategy.
What is a Downsizer Contribution?
If you sell your home and meet the eligibility requirements, you may be able to contribute some of the proceeds directly into super using what is known as a downsizer contribution.
Australians aged 55 and over may be able to contribute up to $300,000 per person into super from the proceeds of selling an eligible home.
For a couple, that could mean up to $600,000 combined being contributed to super.
And importantly, downsizer contributions are treated differently from normal super contributions, which can make them a valuable planning opportunity for some people approaching or already in retirement.
But just because you can make a downsizer contribution doesn’t necessarily mean you should.
The bigger question is:
How does it fit into your overall retirement plan?
Downsizing isn't really about buying a smaller house
When we talk to clients about downsizing, the conversation usually goes much further than property.
Because selling your home can create a significant amount of capital.
And suddenly there are a lot of decisions to make.
Do you:
- Buy another home outright?
- Pay off your remaining mortgage?
- Put money into super?
- Keep some money outside super?
- Invest some of the proceeds?
- Set money aside for travel or lifestyle?
- Help your children or grandchildren?
- Keep a larger cash reserve for retirement?
There isn’t one answer that works for everyone.
The right strategy depends on what you want your retirement to actually look like.
Who may be eligible to make a downsizer contribution?
There are several rules that generally need to be satisfied.
These include:
- You are 55 or older when the contribution is made.
- The contribution comes from the proceeds of selling an eligible Australian home.
- You or your spouse have generally owned the property for at least 10 years.
- The property meets the relevant main-residence requirements.
- The contribution is generally made within 90 days of receiving the proceeds from the sale.
- You haven’t previously made a downsizer contribution.
There are additional eligibility requirements, so it’s important to check the rules that apply to your circumstances before making a contribution.
One of the biggest traps: the Age Pension
This is where downsizing can sometimes have an unexpected consequence.
Your principal residence is generally treated differently from many other assets when determining Age Pension eligibility.
But money released from your home and held in super, investments, cash or other assessable assets may affect your position.
So while downsizing might increase the amount of money available to fund your retirement, it could also change your Age Pension entitlement.
That doesn’t automatically make downsizing a bad strategy.
It simply means you need to look at the whole picture.
How much income will you have?
How much super will you have?
How much will you need to spend?
Will you qualify for the Age Pension?
And most importantly:
How long does your money need to last?
What about CSS, PSS, MilitarySuper or DFRDB?
For current and former Commonwealth Government and Australian Defence Force employees, retirement planning can become even more complex.
You may have a defined benefit pension through schemes such as:
CSS, PSS, MilitarySuper or DFRDB.
That pension may already provide an important foundation for your retirement income.
But you may also have other superannuation, investments, cash, property and potentially Age Pension or Service Pension considerations.
Selling your home and contributing additional money to super therefore shouldn’t be looked at in isolation.
It needs to work alongside the rest of your retirement strategy.
At CTWealth, this is an area we understand particularly well.
Five questions to ask before downsizing
Before putting the family home on the market, it can help to answer five questions.
1. What will our next home actually cost?
Don’t assume downsizing automatically means releasing a large amount of money.
Factor in the purchase price, stamp duty where applicable, selling costs, moving expenses and any renovations or upgrades your new home may need.
2. How much money will we have left?
Once the move is complete, calculate how much capital you will actually have available.
3. What should we do with that money?
This might involve superannuation, investments, cash reserves, debt reduction or a combination of strategies.
4. What happens to our retirement income?
Consider how the decision affects your super, pensions, investments and overall income.
5. Does downsizing actually improve our retirement?
This is the question that matters most.
The goal isn’t simply to have more money in super. The goal is to create the retirement lifestyle you want … and have confidence that your finances can support it.
Make the decision before you move
Selling the family home can be one of the biggest financial decisions you make in retirement.
And once the property is sold, there can be important deadlines and decisions around what happens with the proceeds.
That’s why we believe the best time to start planning is before the SOLD sticker goes up.
At CTWealth, we can help you model the different options.
What happens if you keep your home?
What happens if you downsize?
What happens if you contribute money to super?
What happens to your retirement income and potential Age Pension entitlement?
And ultimately:
Which option gives you the best chance of living the retirement you actually want?
Strategic advice when it matters
If you’re thinking about downsizing and want to understand how it could fit into your retirement plan, we’re happy to have a conversation.
Book a complimentary 10-minute phone consultation.
No pressure.
Just a conversation to help you understand your options before making one of retirement’s bigger financial decisions.
General information
The information on this page is general in nature and has been prepared without taking your personal objectives, financial situation or needs into account. Financial decisions relating to SRDP should always be considered in light of your individual circumstances and, where appropriate, after obtaining personal financial advice.