Don’t make these classic errors
A recent article (How fair is the Age Pension) prompted quite a few Retirement Essentials members to share their (not-so-good) experiences of downsizing.
Here’s what you told us (edited for reasons of space):
Helly says no way!
Does your comment that ‘they *CAN* downsize’ …take into account the fact that:
- there are almost no suitable residences available to downsize to, in the first place
- the massive cost of actually moving house – particularly if you are older / unable to lift and move things yourself and have ZERO relatives to help you – meaning $$$$$ to pay someone to move everything and
- the massive amount in Stamp Duty plus real estate agent fees plus the cost of doing any repairs required and the cost of modifying the residence you are moving to?
It is simply not worth the cost of moving – that is why older people stay where they are! You end up losing a lot of money moving, then you have an asset worth less – so your options for reverse mortgaging have decreased dramatically.
Robyn agrees:
Amen! I ‘downsized’ to purchasing land and building a smaller house with two bedrooms plus a smaller sewing/single bedroom. The cost has been astonishing, as delay after delay has stretched out to 19 months and still not completed. Storage fees, accommodation and other associated costs have made the ‘downsizing’ an expensive nightmare. I cannot apply for a part-Age Pension until final costs are calculated because of daily changes.
Editor’s Note: If Robyn is eligible for a part Age Pension she should apply immediately and then update Centrelink as her circumstances change. Not doing so will mean she misses out on any Age Pension she is currently eligible to receive.
And Christine feels trapped with two properties instead of one
I am in a similar position. I am stuck with an unfinished house (downsizing), am paying two lots of rates, electricity and water, and living off my savings (fortunately I have some), drawing down my super, but cannot get any pension because the house I am building is deemed ‘an investment’. This build has been going for four years and the builder appears to have no appetite to complete it and there is no redress to this.
These comments caught our attention as they share the very real experience that downsizing has meant for some retirees. And yes, there can be a tendency for those in financial services to suggest downsizing will solve a lot of problems in retirement. And while it is true that leveraging the value of your primary property may translate into higher retirement income, the way you go about downsizing can lead to good – and bad – outcomes. Things can go well, but they can also go very wrong. Today we explore what happens in the latter situation.
But first, a cautionary note – the following overview is not a suggestion that you should not downsize. It is an attempt to share some of the pitfalls of downsizing, so that you can learn from the mistakes of others and avoid them! Downsizing can work very well – but you need to do a lot of homework first.
What could possibly go wrong?
There are five main ways that downsizing can lead to disappointment. These can be categorised as the following:
- Emotional decision making
- Financial oversights
- Cost and/or time blowout
- If your household changes
- If you were moving for someone else’s benefit
Here’s how this played out for some downsizers, with names changed for confidentiality:
The wrong move emotionally
When two members of a couple have fundamentally different views on where they should live, it’s difficult to come up with a workable solution. But forcing someone to move is likely to lead to grief. This was the case with Alfred who moved with his wife Robyn from a small weatherboard home with a verandah and garden to a third-storey apartment with no outdoor space. He missed his garden and birdsong badly, lost motivation and social connection in the new neighbourhood and died within a couple of years. His only daughter (from a previous marriage) can barely bring herself to visit Robyn as she thinks the move was a major factor in his decline.
How to avoid this problem
Making joint decisions is not necessarily easy, but compromising totally to please the other half is also not necessarily a good solution. Talk it over, talk it out, try to find a middle way.
When moving leads to a financial mistake
Anika and Ben were in total agreement about the size, nature and location of their new home, so when they found the 2-bedroom apartment on the coast they quickly purchased it. They were equally efficient in listing and selling their suburban family home. They then put the proceeds into a term deposit account. But as part-Age Pensioners, what they had failed to think through was the ramifications of an extra $300,000 on their pension entitlement.
How to avoid (or minimise) this error
Selling a home means moving from an exempt asset to an assessable one. There are many ways to minimise the full impact on any Age Pension entitlements, but you need to consider each and every one before deciding where to move the proceeds of a property sale. Be aware, also that the asset exemption period is 24 months (possibly 36 months depending upon your circumstances). Using this money to top up super can also be tax-effective, depending upon your situation.
When things take longer than they should
As with Robyn and Christine, this is an all-too-common experience post-Covid, when construction delays continue to plague new builds. Similarly costs can be volatile, with budgets blowing out considerably as critical materials or white goods are in short supply and therefore much more expensive than anticipated.
Is this avoidable?
You cannot entirely avoid these issues but working with a trusted and reliable builder can help overcome many of them. Calculating building or moving costs ultra conservatively up front can save a lot of stress – as can including clauses in your contract that means your builder is financially committed to finishing within the expected time.
When your household changes
When we make a move from one home to the next, it’s usually based upon the premise that the current occupants are moving together. But this doesn’t always last. Couples who move may break up and suddenly a single is in a home planned for two. The reverse can happen and singles can repartner, quickly finding their ‘personal space’ is all but gone as someone else moves in. Adult children have a habit of boomeranging back – often with a partner, even children, in tow. These relationship shifts can make the dream downsize suddenly unsuitable.
How can you avoid this?
Unfortunately this is Life with a capital L, so very hard to predict. But you can think about these things before committing. If you are aged, say, 60+, will the new property suit a single as well as a couple and a couple as well as a single? What are your boundaries with adult kids who may wish to return? Make them known!
You moved for the wrong reason or motivation
Your motivation to move may be very noble. Perhaps you believe that downsizing will enable you to be a bigger ‘Bank of Mum and Dad’ for adult children who are keen to purchase their own home? But moving for another adult’s benefit is only fine if the extra money is used as originally envisaged. It’s not okay if suddenly your adult son decides he wants to use your funds to pursue his music career in Scandinavia, see you later!
Can you avoid this trap?
There are many financial ramifications here. Insisting upon a contract for inter-family loans is just good sense. Another consideration might be if you are offered a granny flat in exchange for funds from the sale of your standalone home. You will need to check the detail of ownership so that you have security of tenure as long as you need it.
Can you answer these questions?
In summary, downsizing can bring rich rewards. It can also be a less than satisfying experience. It’s great for some, but not for everyone.
Here’s a short checklist to help you work your way through some of the key decision points and how to navigate them:
- Why are you moving? Are all householders in agreement? It’s fine to have many reasons to move, but are your priorities aligned?
- How much homework have you done on your proposed new neighbourhood – if it’s further than 50 kilometres away should you test it out with a short holiday stay?
- Do you have a realistic idea of the costs of selling, moving, repurchasing? Are you across all fees, commissions and taxes? Have you had a financial professional confirm what you believe will be your net gain?
- If you receive a full or part-Age Pension, do you understand if this financial gain could change your entitlement? This can happen even if you gift the profit, so it’s important to understand the Centrelink rules.
- If the plan is to use excess funds to top up your super, have you done your homework here also? Are you using the Downsizer Contribution? Are you hoping to use Bring Forward contributions? Are you also interested in how the Carry Forward rules might suit you? Our super contributions article covers these in more detail.
- Will your will still be relevant in the aftermath of this change of property?
- If you are unsure about whether downsizing will work for you, have you explored other ways to access equity in your home such as the Home Equity Access Scheme (HEAS) or a reverse mortgage?
Retirement Essentials supports downsizers in four main ways
- Retirement Forecasting (Compare two scenarios of how your assets and income will look during your retirement journey).
- Understanding more about super (get the most out of your super in retirement).
- Maximising your entitlements (making the most of your financial resources and Centrelink).
- Understand impacts of your home mortgage (assess the benefits of repaying, or maintaining your mortgage)
The points you make are absolutely spot on.
Hi Stuart, thank you, but the credit goes to our readers who have taken the time to share their own experiences – which then prompts us to highlight these to the wider group. It’s really helpful to learn from what someone else has done and hopefully, many mistakes or missteps can be corrected for a better outcome. warmest Kaye
your news letters are so informative. We thought about downsizing but after getting a few valuations and looking at what was available on the market we soon worked out that it wasn’t for us. The change over would have cost more than $100,000 and a big house that we didn’t really need.
Thank you for the feedback Sonja and glad to hear we’ve helped you make the best decision for yourself!
What sales tax exemptions are available for aged pensioners purchasing a home.
Hi Helen, the main concession is on stamp duty and works as follows.
A full exemption on stamp duty when buying a home valued at $600,000 or less
A concession (on a sliding scale) on stamp duty when buying a home valued between $601,000 and $750,000
No benefit if buying a home valued at $751,000 or more
If you speak with a solicitor they would be able to give you more detail on the scale and calculations.
It really depends on what state you live in with the costs and reductions. If you are a pensioner in Victoria you might not have yo pay any stamp duty (Now called Land Transfer duty) and you also dont need to contact (and spend more money) a solicitor to work out how much Land Duty you will be paying. Just use this government calcullator to work it out for you. https://www.e-business.sro.vic.gov.au/calculators/land-transfer-duty
We also look forward to the valuable information that your company shares, its assisting us with gaining insight into how to we go about retirement readiness.
We have a large family home, and we would have loved and it would have been really wonderful to see a family with children enjoying the home and the large backyard.
However, we found the fees for selling, buying and other out of pocket expenses to be so expensive and a waste of money.
We took a long good looked around at various properties, lifestyle places, and so on .
Finally we made the decision to stay in our own home and spend the money and make a part of our home age ready.
So helpful for me. I’ve had family and friends trying to encourage me to downsize but my heart isn’t in it. It’s good to have the pros and cons set out so logically.
Hi Jacoba, glad we could be of assistance!
Have you produced a booklet containing all the above including the various attachments. We may be downsizing in a couple of years and would like to have the information handy.
Hi Robert, we do not have a booklet but would be happy to help you via our consultation closer to it happening.
Very very helpful
Issues to me include:
1. The cost of buy and sell including removal costs [as you discuss].
2. Gardening. Cheaper to get a gardener, the 1. costs will pay a gardener for decades.
3. Stairs. The existing house is one level. Stairs become impossible with age.
4. The abode still predates any capital gains issues.
5. Body corporate, other fees and charges can be a shock much greater than existing rates and energy bills.
We moved out of our single story for 3 months, traveled and slept around with kids, gutted the house, double glazed, central heating/cooling, new kitchen and bathrooms, mostly hard ‘wood’ floors, repainted etc., then moved back in…. all for costs similar to the total buy/sell $. Now we have space for grandkids visits. Or can avoid or get together with plenty of space in the same neighbourhood we have been in for 40 years.
Lock the doors and travel whenever. Oh! And stay in love.
it would be better to go overseas and reside in some other countries, such as Spain, Greece, etc., which provide more relaxed and cheaper retirement.
But we should check our entitlements for the old age pension to be able to receive overseas.
I am surprised that you have not mentioned or included basic information on the Government “Downsizer” scheme in your article. The article without this information is out of date
Hi Paul, thanks for your comments – this article was looking more specifically at what can go wrong. We write about downsizing, including the contributions, frequently – here is a link to a recent article on this https://retirementessentials.com.au/news/retirement-advice-australia/pros-and-cons-of-downsizing-working-out-the-real-costs/
If downsizing and looking for a smaller place while staying at daughters, is our sale money classified as income/asset or orly part of the interest? we have
a disability pension and carer pension. thanks
Hi Kim, for Age Pensioners, the proceeds from the sale are exempt from asset testing, only the deemed income (2.25% of the total amount) is assessed. This exemption lasts 24 months to allow time to buy/build a new home. You may wish to check with Centrelink if this exemption is the same for disability/carer payments though as we don’t specialise in them so don’t know for sure if it is the same.
This information is very helpful. I was thinking of downsizing but not so sure now, need to think more about it.
Hi Rhonda, big decisions deserve deep thought – I am a fan of old fashioned pros and cons checklists, with scores out of 10 how significant each factor is – it can help reveal preferences or priorities without our emotions getting in the way. But sometimes (just to be annoyingly even-handed) our gut reactions are our strongest friends. Good luck with your exploration of this change and back yourself to come up with the right answer, warmest, Kaye
Consider downsizing early as it is easier and gives you longer to enjoy the benefits.
Hi Rod, you are saying the same thing as Lorraine – it does seem that the older we are the harder it can be to make a big move
We downsized two years ago. sold our split level house because I could no longer handle the stairs and we couldn’t keep up with the garden. After selling we bought a unit in a neighbouring suburb, it was a new build, single level with a small garden. We are one in a block of five and we are all downsizers apart from one unit which is rented to a young family.
It is so quiet and the local bus stops regularly a block away to take us into the nearby town.
We should have done the move years ago!
Hi Lorraine, thanks for sharing your experience which sounds very positive – people often say they should have made the move years ago – any thoughts on the barriers to making this type of decision?
Thank you for highlighting these issues. I talk to soooo many people who have not even thought through *all* the costs – which can mount up to $100,000 depending on which state you are in. Keeping a larger home also allows you the option of modifying it to rent out part of the home if you want to. Or put a ‘granny’ flat in the back garden and either rent it out or live in it yourself ! But be careful of renting it out as you are then whacked with Landtax – which has recently gone up nearly 40% in the last 2 years. Just to rent out part of the house can cost you thousands in Landtax !! Plus all the new rules to burden landlords such as No Fault Evictions are now illegal. That is, you cannot ask someone to leave your own home, unless they specifically break one of the few rules that Tenants must abide by. Hire a gardener & home help if you need to – it’s cheaper! Or spend the money modifying your home to make it ‘aged person ready’. Australia’s tax system is a massive disincentive to moving house. Trying to ‘shame’ older people to leave their homes (as some media outlets seem to be doing) often does not even mention all these costs. Thank you again, for raising all these issues. I see too many friends selling their houses and ending up with an asset worth far less.
Please also write about the dangers of putting ‘too much’ of your asset base into super. The government has made a nasty change to Binding Death Nominations. You write your Will when you are of sound mind/body and your Will DOES NOT LAPSE. If you become of unsound mind or body (e.g. dementia), then your Will does NOT LAPSE. But the government is now trying to ensure money out of your super is returned to the tax office, NOT your estate or nominated beneficiaries. How? They have changed the rules so that your Binding Death Nomination LAPSES after 3 years. So if you fall into unsound mind / body during that 3 years, you are not legally able to write another BDN. Unless you have organised, before you became of unsound mind/body, to pay a solicitor ($$$$) to be your EPOA (or you have someone you actually trust to do this, for free), then your superannuation BDN lapses and the money is returned to the ATO. All of it. Noting that it is at the discretion of the superannuation trustee. But it is simpler for them to just return all the remaining super to the ATO. Why would they get involved in estate squabbles? Many people are not aware that their super is not automatically part of their Estate and therefore not controlled by their Will. This change to the BDN opens up far more opportunities for Elder Abuse. So many people are getting Dementia, Alzheimers and/or other conditions which render them legally incapacitated and barred from signing such documents. You can live for far more than 3 years and be mentally incapacitated in this way. This change is ***disgusting*** – and totally illogical, given that your Will does not lapse. It remains in force until (and if) you write another one and revoke the previous one. Please, please write about this…many educated acquaintances to whom I mention this huge legal change, are not aware of it and find it hard to understand the very serious ramifications. A *large* proportion of the population have no one who they could trust to be their EPOA. The doors are wide open for Elder Abuse. Obviously, this benefits the ATO as they get a lot more super being just returned to them, instead of going to the nominated beneficiaries (or the Estate to be distributed according to the Non Lapsing Will). Please talk about this !!
What about upsizing , I’m newly divorced 60 and now single in a small 2 bed apartment which I own but really want something bigger with a small garden in the future I will probably not get a pension because of my super but could I upsize use some of my super to pay off my mortgage when I retire and therefore get a part pension and all the other benefits of having a state pension?
Hi Belinda, yes you can upsize if you wish, there is no penalty from Centrelink for doing this.