For many empty nesters, who may not have had the benefit of employer-paid super throughout their working life, the value of the family home can be seen as the jewel in the crown of a retirement funding strategy. After all, who cares about the Age Pension when you’re sitting on good real estate?
Swapping a high-maintenance family home for something smaller can give you more time for the things you enjoy, but keep in mind, it may not deliver the funds needed to enjoy a quality retirement.
Be aware of the ‘sea change’ downsides
The Association of Superannuation Funds of Australia (ASFA) did the sums recently, finding that downsizing for a sea or tree change has the potential to free up valuable home equity.
As a guide, sea changers moving from the Sydney metro area to the popular NSW retiree haven of Forster-Tuncurry could pocket up to $650,000 in home equity thanks to the difference in median home prices between the two regions.
However, there are drawbacks to consider. Choosing to live outside our big cities can make it harder to access specialist medical care – something that becomes more important as we age.
In addition, property price growth in our major state capitals tends to outpace regional areas. This matters because further down the track you may need to rely on home equity to fund the rising cost of aged care.
Remaining in the same city can be even less rewarding
Downsizing within the same city often provides fewer financial benefits than a sea or tree change. Property transaction costs in particular will eat away a substantial chunk of your home equity.
In Sydney for instance, the median apartment price is $762,509, and on that price you can expect to pay $29,807 in stamp duty alone. Once you’ve set aside sufficient proceeds to live off comfortably for the rest of your life, you could be faced with taking a very substantial downgrading in the type of housing or lifestyle you can afford.
The bottom line is that relying on the value of your home should not form the focus of your retirement plans.
A better solution? Your long-term plan
If you’re eager to cut housework or garden maintenance, downsizing can be a good option. However, if you’re hoping to fund a decent retirement, it may make much more sense to grow a separate pool of investments – preferably throughout your working life.
That said, good advice can make a measurable difference to your final nest egg at any life stage, and it’s never too late to get started.
The beauty of relying on your investments rather than your home to fund retirement, is that it gives you choices. If you don’t want to sell a much-loved family home, you don’t have to. And, if a more compact home is on your retirement radar, you can afford to make the move on your own terms, buying where and whenever you choose.
Speak to your adviser for tailored advice that lets you make the most of all your assets, not just your home, to enjoy a fulfilling retirement.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Taking your super as a lump sum might be tempting, but it won’t be the best option for everyone.