4 Key Decisions to Consider When Downsizing for Retirement
1. Why do you want to Downsize?
Downsizing to a smaller home must be done wisely and with time. When planning to downsize you need to consider the financial, social and emotional impact of your decisions. First, consider the reason why you want to move. You might long for a more luxurious lifestyle or a place closer to your family and friends. Be realistic about what you would actually do when day-dreaming about why and where you want to move. What facilities do you want to have in close proximity? What about proximity to care and medical services? As we age our care needs will increase. If you need care it is important to know how you can access those services, how much they would cost and how quickly you can access those services. Remember there is no right or wrong answer when it comes to downsizing. There is only the choice that is best for you. You have many options of accommodation available to you. Depending on your needs and circumstances you might consider downsizing to an apartment, townhouse, granny flat, aged care community, independent living, retirement community, mobile home or just a small low maintenance home. Rachel Lane & Noel Whittaker in their book titled, Downsizing Made Simple, recommend trying before buying. Before committing to moving in with your children give it some time before committing to the move, and when thinking about moving to a new community (retirement community, independent living or aged care community) renting for a period of time before buying is a safer option. As Lane and Whittaker (2019) note, “Some people say rent money is dead money but if you rent for 6 or 12 months and realise that it really isn’t for you the cost is likely to be a fraction of what it would have been if you had sold your home, moved and then moved again.” (p.13)
Based on analysis of the Australian Housing Aspirations (AHA) survey and interviews with older Australians and key stakeholders “older Australians perceive ‘downsizing’ as more than just a move to a dwelling with fewer bedrooms, smaller land area and lower value. Rather, it refers to a residential move that meets their changing housing needs and is appropriate for the later stages of life. “ (James; Rowley and Stone 2020)
Downsizing is usually associated with moving to a property that is more cost-effective, close to amenities, and easier to maintain but, as mentioned above, it can also mean reducing your belongings (decluttering) as articulated by this downsizer ‘Doing the downsizing is getting rid of the clutter, working out what furniture you really need … To be able to say, ‘Well I don’t use this anymore,’ or ‘I don’t need this anymore,’ and then being able to either sell it or give it to the family or give it to the op shop. It’s got everything to do with furniture (Female, home owner). (James; Rowley and Stone 2020)
2. Planning your pension for retirement.
The rules of the age pension system are continually changing. To be eligible to receive the pension you have to, firstly, be of pensionable age, which by 1 July 2023 will rise to 67. Secondly, Centrelink will use an assets and income test, and apply the one that gives you the least pension. And finally, you must be an Australian resident for at least 10 years in total and there must be no break in your residence for at least five of the 10 years. It is important to note that some people may be exempt from the final rule. Services Australia further explains the residence rules. Other factors that can affect your age pension rate include your relationship status and income and assets from outside Australia.
Your assets include everything you own – including your superannuation – with two exemptions. The big one is the home you own, then funeral bonds up to a certain value are also excluded from both the assets and income test. The age pension asset threshold , under which you receive the full pension is rather high but if your assets exceed the threshold your pension will be reduced. Pensioners may reduce assessable assets by spending money on their home, buying a more expensive house, travelling or gifting. These methods can reduce assessable assets but should only be used after much thought and professional advice.
The income test assesses all your (and your partners) sources of income, including your superannuation. Centrelink uses deeming to work out how much income your financial assets produce. This amount is added to your other income. Centrelink will then apply all your income to the income test to work out your payment rate.
Eligibility for a part or full pension gives access to the Pensioner Concession Card – giving you cheaper medical costs, and depending on your location, concessions on utilities, council rates, public transport and vehicle registration.
For those that want to continue earning some extra money after retirement, the Pension Work Bonus allows you to do so without affecting the rate of your pension. Pensioners can earn up to $300 a fortnight from wages or eligible self-employment income. Your income does not have to be below the $300 threshold each fortnight. Centrelink tracks the total annual income which can accrue up to $7,800. (* figures are current as of the date of this article)
3. Superannuation and downsizing contributions.
Growing and managing your super as early as possible for retirement is important. As an employee a percentage of your salary is set aside, if you are self-employed you can choose whether to contribute to your super, as a contractor or temporary resident working in Australia, you may also be entitled to super.
Throughout your career you will have had the opportunity to make contributions to your super but what happens after you retire? Making a downsizing contribution from the sale of your home is one way to contribute to super after you have retired. If you are aged 65 and over you can contribute $330,000 ($660,000 combined for a couple) of the proceeds of the sale of your home, if owned for 10 years or more, into your super. At present, if you are 67 and over, you can’t make an after-tax contribution to your super, unless you meet a work test that requires you to work for at least 40 hours over 30 consecutive days during the financial year in which you make contributions. After the age of 75, you cannot make further non-concessional contributions, unless you are selling your home.
The downsizer contribution is subject to some eligibility requirements:
- You must be 65 years or older at the time you make a downsizer contribution
- The contribution must come from the proceeds of selling your principal place of residence, which must be in Australia and cannot be a caravan, houseboat or other mobile home.
- You, your spouse or former spouse must have owned your home for 10 years or more prior to the sale – the ownership period is calculated from the date of settlement of purchase to the date of settlement of sale.
- The contribution must be made within 90 days of receiving the proceeds of the sale
- The contract of sale on your home must be on or after 1 July 2018
- The proceeds of selling your home are either exempt or partially exempt from capital gains tax under the main residence exemption or, would be to such an exemption if the home was acquired before 20 September 1985.
- You have never made a downsizer contribution into your super
For further and up-to-date figures regarding Superannuation Contributions visit the Australian Tax Office – Downsizing Contributions into Superannuation.
4. Where should you go next?
There are several options for older Australians to consider when downsizing from the family home or principal place of residence. Cameron Early (2020) briefly highlights some of the housing options available to seniors, “Specialised housing accommodation options for seniors who have suitable financial means are broadly offered in three different mediums throughout Australia and each style of accommodation is generally pitched towards an age bracket or in the alternative, towards one’s care needs. Seniors without financial means or in public or private rental accommodation can access Home Care assistance through the Commonwealth Government’s Home Care Package System. However, as and when one’s care needs exceed what may be offered at home, Concessional accommodation may be available at a Residential Aged Care facility”
Amongst these many housing accommodation options for seniors you need to consider accommodation types, community facilities, life-styles and activities, as well as the care services available if you need them, and the legal and financial arrangements that apply. Finding a place that provides you with the care and support you need, in a community you want to be a part of requires research ( Lane and Whittakker, 2019).
Downsizing is an exciting journey into a new stage of your life and there are many factors to consider to achieve the lifestyle you desire. Planning for your retirement does require extensive research, professional advice and time. Don’t wait too long to start planning your downsizing journey. You’ve worked hard enough to enjoy your Golden years so don’t let time get the better of your dream retirement goals and a secure future for your golden years.
Lane, R & Whittaker, N (2019). Downsizing Made Simple.
James, A., Rowley, S. and Stone, W. (2020) Effective downsizing options for older Australians, AHURI Final Report No. 325, Australian Housing and Urban Research Institute Limited, Melbourne.
Early, C (2019). ‘Next Stage’ Accommodation Options for Seniors in Australia [White Paper]