Selling the family home can make sense for older adults. Many find themselves in large homes no longer needed after their children move out. Downsizing to a smaller, cheaper home or relocating to a less expensive area can free up funds for retirement and offer a chance to travel and enjoy retirement. Additionally, there are tax benefits if you contribute the proceeds to your superannuation fund.
1. Smaller May not be cheaper
While downsizing can be financially beneficial, it’s not always cheaper, especially if you stay in the same area. Only 22% of downsizers remain in their original neighborhood. Moving can also be emotionally challenging, as it often means leaving behind friends, neighbors, and local services. It’s crucial to research the new area’s amenities, particularly health services.
You need to do your homework on what services, particularly health and hospitals, are available in your new destination. Just because you are in good health now doesn’t mean you won’t need a wide range of medical help down the track.
2. Make sure to crunch the numbers
Selling a house to unlock funds can come with underestimated costs like conveyancing, marketing, real estate agent fees, stamp duty, and removalist services. Preparing the house for sale, such as painting or professional styling, and upgrading the new home can also be expensive.
Consider Paul and Catherine, who lived in a large home near Melbourne. In their 70s, they decided to downsize and move closer on the Gold Coast. They bought a new house for $1.8 million, expecting to sell their old one for the same amount. However, it took 10 months to sell, causing significant stress and financial strain. They paid $10,000 a month in bridging finance, reducing their superannuation, and eventually sold their old home for $240,000 less than expected. They spent an additional $60,000 on new furniture and upgrades for the new home.
Despite loving their new home, Catherine describes the process as a saga, highlighting the importance of carefully planning and understanding all associated costs.
3. Using Super for the surplus funds
The federal government introduced the downsizer contribution in 2018, and by April 2023, 58,000 people had used it, adding a total of $14.5 billion to their superannuation, according to the tax office.
This scheme allows eligible single individuals to deposit up to $300,000 into their superannuation when selling their home, with couples able to contribute up to $600,000.
The benefit of this contribution is that any income earned in the superannuation account after age 60 is tax-free in the account-based pension phase. Mark McShane of Chrysalis notes that superannuation is a tax-efficient way to draw down money over time because pensions paid from it after age 60 are tax-free.
Eligibility for the downsizer contribution has broadened over the years. Initially for homeowners aged 65 and over, it was lowered to 55 starting January 1 this year.
To qualify, your home must be in Australia and owned by you or your spouse for at least 10 years, and it must be exempt or partially exempt from capital gains tax. Contributions must be made within 90 days of receiving the sale proceeds.
However, this could affect eligibility for the age pension or part pension. Converting home sale proceeds into superannuation might disqualify you due to the means test.
For the full age pension, singles need less than $301,750 in superannuation and other assets, while couples need less than $451,500. Adding $300,000 (single) or $600,000 (couple) to superannuation could sharply reduce the part pension due to the taper rate, which reduces the pension by $3 for every $1,000 above these thresholds. This translates to a loss of $78 a year or 7.8% of the additional assets.
At New Wave Financial Planning, we are dedicated to helping Gold Coast residents achieve their financial goals through expert guidance and tailored financial planning solutions. Our financial advisor is ready to support you in developing the budgeting skills you need to secure your financial future. Contact us today to schedule a consultation and start your journey towards financial success and independence.
