To maximize the financial benefits of downsizing and ensure a smooth transition into retirement, integrating it into your overall retirement plan is key.
Consulting with a fiduciary financial advisor who specialises in retirement planning can help you navigate the financial complexities of downsizing.
Together, you can explore assorted options, assess the potential impact on your retirement income, and develop a tailored strategy to use the freed-up funds most effectively ensuring a smoother transition into your new, simplified life.
Downsizing: Beyond the “Smaller” Space
Downsizing often conjures images of a quaint, low-maintenance home - a perfect fit for a simpler lifestyle.
But the reality of downsizing goes beyond the square meterage.
While the prospect of a smaller space can be appealing, neglecting the associated costs and long-term implications can turn this streamlining dream into a financial burden.
Let's explore four of the most common pitfalls to be aware of before taking the plunge.
1. The Hidden Costs of Moving Smaller
Downsizing isn't just about buying a smaller property.
There are many hidden one-off expenses to factor in: Real estate agent fees, marketing costs to sell your house, legal costs, stamp duty (which varies by state), and moving expenses can quickly chip away at the expected profit from your current home.
Don't forget potential renovations, home modifications (e.g. for future mobility and access) or upgrading furniture to adapt to the new space.
Underestimating these costs can significantly affect your financial situation after the move.
2. Age Pension and Downsizing: An Unexpected Link
Downsizing can have surprising consequences for your Age Pension eligibility.
If the proceeds from selling your home aren't reinvested in another residence, they may be considered as part of your assets and income, potentially reducing or even ending your pension payments.
Remember, for every $1,000 exceeding the asset test limit, your fortnightly pension payment decreases by $3. This means a leftover $100,000 could translate to a reduced pension by $7,800 per year - a significant impact on your finances.
This applies not only to your pension but also to your partner's, if they're also a recipient.
3. Taxes and Downsizing: Not as Straightforward as You Think
While your primary residence is typically exempt from capital gains tax (CGT), the profit from the sale can have tax implications elsewhere, depending on what you do with the money.
Any investments made with the proceeds could see the generated income subject to tax. In some cases, depending on prior use of the property (e.g., rental income), portions of the sale may even be liable for CGT.
Consulting a fiduciary investment advisor can help navigate these complexities and explore strategies like contributing some of the proceeds to your superannuation.
This can potentially reduce future income taxes while allowing you to live off the earnings and capital within the super fund, if you are over age 60.
The “downsizer” concession lets eligible, single people deposit up to $300,000 directly into their super when they sell their home. It is double that for a couple.
4. Planning for the Long Haul: Downsizing with Future Needs in Mind
Many people downsize without considering their future needs, such as potential healthcare requirements, mobility issues, or proximity to family and essential services.
This can lead to unforeseen costs down the line. If significant modifications are needed to accommodate future healthcare needs, or if you find yourself needing to move again due to limited accessibility, the first financial benefits of downsizing could be eroded.
Financial alternatives to downsizing
If the primary reason for downsizing is to release home equity, there are some alternatives available that mean you don’t have to deal with the significant burden of moving house when the timing is not right for you.
Reverse Mortgage
A reverse mortgage lets homeowners aged 60+ borrow money using their home as security.
You keep owning your home and get money as a lump sum, regular payments, or a line of credit.
No repayments are needed until you sell the house or pass away.
Home Equity Access Scheme (HEAS) (Previously called the Pension Loans Scheme)
The Home Equity Access Scheme is a government program that lets you borrow money using your home's value as security.
It's optional and doesn't count as income for tax purposes.
You can choose to get the money as regular payments (of up to 1.5 times the maximum age pension rate) or a one-off lump sum (subject to certain limits).
The amount you can borrow depends on your age and your home's worth. You don't have to be getting a pension to qualify, but you must be pension age (currently 67).
Note: If you are considering drawing on home equity, it is essential to seek advice from a fiduciary financial adviser or another suitable professional with expertise in downsizing and retirement planning, as the loan interest compounding over long periods of time can result in significant debt.
Book a free 15-minute consultation here to discuss your specific situation and explore how to optimise your retirement plan.
Find out more about how we can help: https://www.providencegroup.com.au/retirement-planning-services
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