Retiring is an exciting stage in life. It means the enjoyment of many years of hard work and effort. It can also be a challenging time where numerous questions pop up, leading to confusion and insecurity as retirees attempt to navigate an ever-changing financial landscape. One way for senior Australians to approach this is to consider downsizing into smaller homes which can help control finances better. As expenses lower with downsizing, retirees can have better cash flows.
Many Australians in the age group of 55 and older are open to retiring but it can be challenging to choose to downsize, especially when the real estate market does not always have plentiful options. This can be a tough decision emotionally, physically, and financially and should only be done after thorough research and self-reflection.
Take a look at this easy guide for retiring seniors to downsize their homes in Australia and better understand why downsizing can be an excellent real estate decision for homeowners.
Why do Seniors Downsize in Retirement?
Primarily, seniors are motivated to downsize their homes due to their financial situation. Retiring often comes with a decrease in income that can be difficult to make up as they age, if not impossible. Many are living on fixed incomes with limited savings. Selling their home can give them a much-needed recharge of finances.
Of course, this may not be the only reason a retiree may choose to downsize. Some will move due to circumstances around failing health, limited mobility, or losing a beloved spouse or loved one. Moving into a more accessible home or smaller home can be highly beneficial, as is the overall proximity of a family support system.
It can’t be understated what a huge life change this can be for seniors, and they should take their time to truly consider whether this will be worthwhile to avoid future emotional regrets or financial loss.
It’s always in a retiree’s best interest to reach out to a financial adviser to determine how to handle this significant change and find the best way forward.
Considerations for Downsizing
There are multiple factors to be considered when choosing to downsize for retirement purposes, and retirees should ask themselves some key questions before they decide to purchase or move into a new home.
What’s important to them in location? Would they like to live closer to amenities like grocery stores and hospitals? For those with mobility issues or transportation difficulties, it may be better to choose a new home closer to their preferred hospital, or physician’s office. They may find that public parks or access to the beach are an essential part of their retirement leisure.
The home layout is another important consideration, and they’ll need to reflect on how that may impact them. Living room space, kitchen space, and spare bedrooms may be vital if they wish to entertain. If they have limited mobility, they may consider living in a flat layout [on the ground floor], instead of a multi-storey house. A garden for those with a green thumb and a shed for handypersons can additionally be an excellent way to keep up with hobbies.
Some of these things may need to be compromised. A retiree looking to slow down is unlikely to want to spend time on the upkeep of a much larger house, and downsizing can be appropriate so that they can relax.
How much time is there to spend on buying, selling, and moving? Will friends or relatives be able to help with the process?
Many people still live in age-old family homes passed down through the generations. For those seniors, having to sell their homes for financial or health reasons can truly be emotionally daunting. Having to declutter or get rid of items with an emotional attachment held to them can be a significant compromise for many.
Retirers should take it slow and seek help from family and friends so that all keepsakes get safely packed away, and the decluttering process goes smoothly. If there are any belongings with a sentimental attachment to them, downsizing is an excellent time to see them go to their respective family members to avoid unfortunate arguments later.
Financial Perspective of Retirement Downsizing
From a financial perspective, downsizing in retirement can have various benefits. Firstly, selling your home can bring in an infusion of cash that can significantly help offset a drain on retirement savings in the future. Purchasing or renting a smaller home with a lower monthly overhead in terms of mortgage, rent, and bills can help reduce the cost of living. There can also be some costs associated with the downsizing and moving process.
When seniors downsize to a more cost-effective home, they’ll be decreasing their monthly mortgage or rental payment. Doing so can lead to increased income through better cash flows that can be used for other activities, such as leisure or savings.
Maintenance & Repairs
Less cleaning, maintenance, and repairs will be needed for a smaller home. A retiree won’t need to spend as much time keeping up an expansive yard and garden, having funds available for other purposes instead.
Lower Utility Bills
Additionally a home with fewer rooms won’t incur the same heating or electrical costs, driving utility bills down. And a smaller home isn’t going to carry as hefty an insurance policy that a much larger home might need.
This extra cash flow can also go into the homeowners’ superannuation, which is a way of saving for retirement and earning retirement income. Superannuation money can be taken by the retirees as either a lump sum amount or as superannuation pension. As of July 1st, 2021, all general concessional contributions cap at $27,000 regardless of age. Concessional contributions get taxed at a rate of 15%, which is considered your contribution tax.
Retirees in Australia are also offered some incentives to downsize from their larger homes and move into smaller ones. In May 2022, the government and the Australian Taxation Office [ATO] revealed several of these, mainly regarding tax implications.
The first is an extension of a tax break that allows up to $300,000 from the sale of a home to be placed in superannuation without penalty. This does not count toward other caps, which means it’s a significant government incentive for sellers to put their homes on the market, offering them significant benefits. The other change is that sellers will be exempted from the assets test for two years, while previously, it was one.
Repair & Staging
Unfortunately, there are still some costs incurred when retirees decide to downsize their homes, the most obvious of which usually relates to repairing or staging the current home for sale. Staging cost and repairs include repainting or repairing drywall, resealing driveways, or touching up other general wear and tear to fixtures and fittings like doors or windows. It would be better to not spend on any major renovating as it may not yield as much benefit and the new owners may have different tastes.
Property valuation costs can vary as there are some free basic services available on one end. whereas a seller could go through an independent appraiser on another end which can cost around $600 or so.
Fees & Duties
Real estate agent fees and Legal Fees are set by market demands, which means they can be on the higher side, and prone to change. Hiring any financial advisers during the downsizing process will also include heavy charges.
Additionally, the stamp duty, which is a tax paid on the property’s value, can be upwards of 5.75% and depends on the property in question.
Furniture removal and moving costs are yet another source of losing money while leaving your current home. This is when reaching out to family members can be helpful, rather than spending money on a costly moving service.
Impact on Age Pension
The Age Pension is a part of the benefit that Australian citizens can receive when they reach the age of 66 years and six months. An important eligibility criteria is for the individuals to be Australian citizens for ten years and meet the income and assets tests.
Singles are eligible for up to $900.80 a fortnight or $23,420.80 a year while couples are eligible for up to $1,358 a fortnight or $35,308 a year.
If your income or assets exceed a specific limit, your pension entitlements may be reduced. An income test includes:
while Asset test includes:
The Australian government goes into further detail on what counts as an asset, which can be found here. In prior years, selling your home could affect your pension. However, recent policy changes mean sellers are exempted from the asset test for two years rather than just one.
Options after Downsizing
After seniors and retirees downsize, they can consider their living options for the future. Purchasing a new home likely has an appeal, especially with a significantly lower mortgage rate now that they’re in a smaller property. Renting is also an option and likely preferable for those who aren’t interested in dealing with the personal upkeep of a privately owned property.
Others may choose to move into a retirement village or look into aged care so that they can assure they’ll be looked after as they grow older. This is especially helpful for those who may not have a lot of family or friends in the area. Those with a strong support network may opt not to purchase or rent and instead move in with their family to enjoy their later years.
Seek Further Advice
With so many considerations involved, retirement planning in Australia can be an overwhelming thought and moving to a smaller place can be a tough process. Retirees should take sound real estate and financial advice before making any life changing decisions. They should also be wary of tax implications and any additional government benefits to gain the most out of the situation. In the end, retirees should not shy away from seeking the support of family and friends as it can be instrumental in helping them transition into a comfortable retirement period.