Thinking about downsizing before retirement?

If you have calculated the exact amount required to fund your retirement but you’re unsure how to achieve that goal, have you thought about downsizing before retirement?

“There is a lot of power in downsizing. It can free up money that you can use to support your retirement,” says James Wrigley, one of our Principals at First Financial. “I have had clients who dream of regular overseas travel and other fun activities, but their super alone isn’t enough to get there. That’s when it’s time to look at other assets, like your home.”

At First Financial, we specialise in helping our clients achieve their preferred retirement timeline and lifestyle. For some, selling the family home before retirement is a feasible and effective means of reaching their financial goals.

Let’s say your retirement dream is to live a comfortable, domestic lifestyle with some overseas travel each year. You’re probably going to need around $120k per year to sustain that. When you factor in inflation, that’s a total of around $2.8 – $3 million in assets required to retire. However, if you find that your superannuation falls short of this target, and you don’t anticipate reaching it by your desired retirement age, what options do you have?

Assuming that you own your home outright, downsizing before you get there could be just what you need. And by downsizing, we don’t necessarily mean a smaller home, we mean moving to a home that is less expensive, in order to free up your equity.

For example, if you and your spouse project that your combined superannuation total upon retirement will be around $2m, you’ll be around $1m short of the goal. But say your home is worth $4m? Even if you downsize to a property worth $3m, that $1m in equity puts your retirement dream within reach.

In addition to the immediate equity gained from selling your current home, downsizing offers several other advantages. If you choose a smaller residence, you’ll experience a decrease in both living and maintenance expenses. Alternatively, even if you decide to maintain the same size property, opting for a more affordable home will lead to reduced rates, thereby contributing to boosted savings in either scenario.

Enhanced cash flow in the years leading up to retirement can undoubtedly bring significant benefits. Not only does it provide greater financial security, but it also offers the flexibility to enjoy life to the fullest in the present. Moreover, if relocating to a new area is part of the plan, it presents an exciting opportunity to meet new people and explore new places.

By opting to downsize and capitalise on your equity well before retirement, you have the advantage of time to diversify your investments. This strategic approach may lead to even greater financial gains when the time comes to transition into retirement. At First Financial, we offer investment management services to help you make decisions that match your investment profile, personal ethics and goals.

Downsizing can present a fantastic opportunity to significantly bolster your superannuation funds. Since January 1, 2023, Australians aged 55 and over have been eligible to make a downsizer contribution of up to $300,000 to a complying super fund, an age limit that was previously set at 60. To qualify for downsizer contributions, you must have owned the property for at least 10 years.

As long as your spouse is also over 55, they can make up to $300,000 in downsizer contributions to their own super from the same proceeds, regardless of whether they are an owner of the property or not.

The benefits of these contributions are extensive. They do not count towards any of the contribution caps and the total super savings test does not apply, allowing you to add to your super regardless of the current balance. Also, the downsizer contributions are after-tax contributions, so you do not need to pay any taxes on the way in, which provides a tax-efficient advantage.

When contemplating whether to downsize before retirement, it is important to strike a balance between emotional considerations, such as attachment to your home and community, and the financial advantages it can provide to secure your future during retirement.

From an emotional standpoint, your home holds countless memories, particularly if it has been the sole abode where you raised a family. Considering the potential impact of downsizing on your family, both in the present and future, is only natural. You may wish to have the flexibility to accommodate potential grandchildren or other family members down the road.

In making your decision, it is crucial to balance the emotional factors with the financial benefits of realising your retirement dream. The current housing market conditions are another factor. If the market is favourable for sellers, it might be a good time to capitalise on your property’s value.

Downsizing before retirement may just be the right strategy for you.

At First Financial, our team of experienced and knowledgeable financial advisers dedicate themselves to helping you plan the perfect retirement. We provide expert guidance so you can make educated decisions on the most effective strategies to achieve your goals.

If you are on the countdown to retirement, contact us to discuss the power of downsizing and other effective strategies today.

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