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The art of downsizing: A strategic retreat for a smarter retirement

Deciding to downsize involves a delicate balance between emotional ties and practical necessities. While the financial benefits can be worthwhile, it’s crucial that retirees approach this move with a clear understanding of their priorities and objectives.

Many Australians, as they approach their golden years, wrangle with the decision to downsize from a larger family home to a more compact dwelling. Whether downsizing is a smart retirement move is not a one-size-fits-all solution, instead requiring a nuanced consideration of personal circumstances and financial goals.

The notion of downsizing is generally laden with emotional attachments. A family home, with its trove of memories and accumulated possessions, is not merely a physical structure but a repository of a lifetime’s experiences. However, as retirees grapple with the practicalities of maintaining a large property, the idea of simplifying life gains traction.

The financial implications of downsizing can be significant, freeing up equity that may have been tied up in a larger property and providing a potential windfall for funding retirement.

  • According to Renato Manias, a senior financial adviser at Wattle Partners, a person can use any excess funds after selling a home to make up to $300,000 in contributions to their super fund under Downsizer Super Contribution tax provisions. That’s on top of the non-concessional contribution caps of $100,000 per year, or $330,000 using three-year carry-forward contribution rules.

    “If you are a member of a couple, this means that, combined, you can make up to a $600,000 contribution under the Downsizing Superannuation Provisions, even if your spouse/partner does not own a portion of your principal residence.”

    Manias added that the main eligibility criteria for the provisions are that the person has used the home as their principal residence for at least 10 years, is over age 55 and makes the contribution with 90 days of receiving the sale proceeds.

    How to time the downsizing process can be a source of anxiety, with many around retirement age worrying about missing the boat or getting market movements wrong. Some may find that transitioning to a smaller home costs the same amount for the larger house they’ve just sold, Manias said, although he noted that the new home does not need to be cheaper for the Downsizer Superannuation Contribution provisions to be available.

    “You should start thinking about downsizing as soon as your house becomes too big for you,” he said. “There are additional costs to owning a big house – higher council rates and maintenance costs – so the sooner you make the decision to move to a smaller home, the more you will save in housing costs.”

    He noted that living closer to the city centre of a state capital generally makes homes more expensive. “Retirees should seek to live closer to amenities, such as public transport, parks, shops and cafes, and also seek to live closer to their family and friends so they can have the necessary support nearby,” he said.

    Downsizing is not just a financial transaction; it is a lifestyle choice. Smaller homes often come with lower maintenance costs, requiring less time, effort, and resources to keep in pristine condition. This newfound freedom allows retirees to redirect their energy to pursuits of their choosing.

    But the decision to downsize is not without its challenges. Emotional considerations, such as leaving behind a home filled with cherished memories, can weigh heavily on retirees. And the shift to more compact living necessitates a recalibration of one’s mindset and an embrace of a simpler, more efficient way of life.

    Another reality is that housing market dynamics play a crucial role in the success of a downsizing strategy. Timing the sale of a larger property to coincide with favourable market conditions is essential to maximise returns; the availability of suitable smaller homes in desired locations is also an important consideration.

    “Before making the decision to downsize, you should seek financial advice to ensure that you are fully informed about all the financial implications of downsizing in relation to your own personal circumstances,” Manias said. Downsizing is not merely a downsizing of square footage; it’s a strategic retreat, a thoughtful manoeuvre designed to enhance the quality of life in retirement and pave the way for a more fulfilling and sustainable future.

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