Downsizing - is it time? 🏠
Written by Glen James
Host of the Retire Right & money money money (formerly my millennial money) podcasts & author of The Quick-Start Guide to Investing.
If you or someone you know has lived in a larger family home, had kids, then become an empty nester, it’s common to start thinking about that next move.
It can be difficult saying goodbye to what has been a warm, welcoming and safe home (aren’t we so lucky to enjoy this in Australia?) – but sometimes the practicalities of life change and we take a chance to reimagine what our home could look like.
To help you determine if it’s time to downsize, here are 5 important questions to answer for your own situation:
#1 What are the financial costs and benefits of selling your home and buying a smaller one?
Of course, in selling a home, there are sale costs to consider. You’ll need to be prepared for real estate agent fees, maintenance required before sale, moving needs, conveyancing fees, marketing & staging costs. And in buying a new home you need to know you have the cash to buy that next place – the purchase price, stamp duty costs, conveyancing fees, move in costs, etc.
However, one of the major financial opportunities to consider is the downsizer contribution you could make to your superannuation. If you are 55 or older, you may be able to contribute up to $300,000 from the proceeds of the sale (or part sale) of your home into your superannuation fund. This contribution is a non-concessional contribution, but it doesn’t count towards the contribution cap. To be eligible your home must have been owned by you or your spouse for 10 years or more before the sale and there are some other requirements to meet (learn more here). There is an episode on the Retire Right podcast all about this topic, and it’s well worth a listen to see whether this is right for you and to understand the conditions you must meet to be eligible. Listen on Spotify or Apple Podcasts.
#2 How will downsizing impact your lifestyle needs and space requirements?
The most common challenge in downsizing is adjusting to a smaller space. At first this might feel like a restriction, but there are a number of benefits that come with a smaller space – your expenses are likely to decrease, you’ll have less maintenance to perform and there’ll be less room for clutter. Think through what you need on a day-to-day basis – flat entry ways, access to public transportation or car parking, a garden, number of bedrooms, etc. Your family home suited the needs of your family as it grew, now we need a home that suits you and your family as it stands now.
#3 Are you emotionally ready to leave your current home?
It’s ok if you aren’t quite ready emotionally to leave your current home. It’s important that you recognise the emotional impact it has on you – then you can process those feelings. You have so many memories of enjoying your home! The garden you planted by hand, memories of bringing newborns home for the first time, the Christmas gatherings in the living room. If you know it’s time to move on, take the opportunity to document the fun you had in the house – create a photo album, record videos, ask your family to share their favourite stories from living there. Homes are important to us, and we should recognise the role they’ve played in our lives. Move when you have processed the way you feel, this is a really important step.
#4 Is the current real estate market favourable for selling and buying?
This is where a little bit of property knowledge goes a long way. You may not be able to choose exactly when you sell, but listening to a podcast like this is property (Spotify or Apple Podcasts) can help give you some knowledge on when you might be best suited to sell. It’s also important to develop a realistic idea of how much you could expect to sell for – jump on websites like domain.com.au or realestate.com.au and get to know what sales have happened in your suburb recently. Watch how sales perform over a few months so when you meet with your real estate agent, you have some research in your pocket to help inform your sale.
#5 Have you considered how selling your home aligns with your overall retirement goals?
Downsizing can be a strategic move that not only simplifies your living situation but also unlocks equity tied up in your home. This additional cash can boost your retirement savings, provide a cushion for unexpected expenses, or fund those long-awaited travel plans. However, it’s important that you direct the proceeds of the sale toward your retirement goals. Consider how this change aligns with your desired lifestyle and proximity to family, friends, and healthcare services. Be smart with where you decide to focus the cash, especially after spending a lifetime paying the mortgage on it!
Deciding to downsize is a significant step that requires careful consideration. By reflecting on these five key questions, you can better understand your readiness and the potential benefits. Downsizing offers a chance to align your living situation with your current lifestyle and future goals. It's an exciting new chapter! Tune into our Retire Right and this is property podcasts for more insights and support on your journey.
Community question
Rhona asks: Is it advisable to put your home in a trust for your children? Thinking of retiring overseas and concerned about selling the house because of the dire housing shortage and thinking about the grandchildren in the future?
Glen: When it comes to these types of questions, I know enough to be dangerous. So I'll first say you need to get legal advice. But let me help with some practicalities. Changing the owner of your property may trigger a stamp duty event, which is a cost that no one wants to pay. In relation to thinking of retiring overseas you can still own that asset and receive the rent from that asset and fund your lifestyle while still owning the house in your name. Yes, there is a housing shortage and it's so good that you're thinking about the grandchildren in the future, but effectively having a trust probably does a very similar thing when you die as what your will does.
So, in your will, you can actually elect that houses go to various people, or to one person to be sold and the money distributed. Or you might even talk to your lawyer and talk about a testamentary trust, a trust that is created upon your death.
This gets complex really fast, so I'll leave it there. And I think if you seek legal advice, you might find that you don't need to move the asset into a trust before you die.
I hope this is helpful starting point!