Do’s and Don’t of downsizing your home
Downsizing your home is a big decision for retirees in Australia and one that requires much thought and planning. A large home and garden is great when raising a family but cleaning and maintenance can become labourious when the chickens fly the coop. Throw in some health and mobility issues and downsizing your home to a smaller home or unit, or even a retirement village, can become an attractive proposition. There are a number of financial implications to consider regarding social security and estate planning, so here are some ‘dos’ and ‘don’ts’ to ponder before making that important decision.
1. START THE PROCESS EARLY
Start early if you intend to downsize. It’s a stressful thing to go through and it doesn’t get easier as time goes on. Besides, you want to make the most of your new surrounds and have plenty of time to enjoy your new lifestyle. Plan the move some years out and begin to scout the area you wish to move to as well as working through the numbers associated with the move.
2. INVOLVE A THIRD PARTY IN THE PROCESS
Buying a home can often be an emotional decision; however, this is one point in your life where some rational logic needs to be used. There are many financial considerations besides just the look and feel of the home or location, so involve a third party in the decision making. Whether that is a family member, friend or financial adviser, you need someone who can bring a fresh pair of eyes to the situation and assist with making sense of the fine print.
3. CALCULATE THE IMPACT ON YOUR SOCIAL SECURITY ENTITLEMENTS
Speak to your adviser and have them calculate the impact of your move on your social security entitlements so you know where you stand. If you don’t have an adviser, Centrelink provide a free Financial Information Service (FIS) to assist you in making an informed decision.
4. WHEN CONSIDERING RETIREMENT VILLAGES, CALCULATE WHAT YOU (OR YOUR ESTATE) WILL BE LEFT WITH IF YOU DECIDE TO LEAVE
Most retirement villages in Australia operate under ‘Deferred Management Fee’ (DMF) schemes where a fee is incurred for each year of occupation. This means you lose a portion of what you paid to enter the village for each year that you live there. Upon exit, the DMF is paid from the re-sale proceeds. This means the amount you are left with is likely to be very different to what you would have if you owned a freehold house or unit.
5. FACTOR IN THE MONTHLY FEE PAYABLE TO THE RETIREMENT VILLAGE OPERATOR
You will generally have a monthly fee payable to the village operator to cover the running expenses of the village. This is in addition to what you paid to get into the village and will likely be indexed with CPI as time goes on, so you need to factor this into your calculations.
1. DON’T BUY BEFORE YOU HAVE SOLD YOUR CURRENT HOME!
Regardless of how marketable you think your current home may be, do not sign the contract to purchase another home until you have secured a sale on your current dwelling. I have witnessed this a few times and it can get ugly, causing unnecessary stress on those involved. It may necessitate the need to obtain bridging finance or the selling of other assets which complicates things even further. Also, if you haven’t yet sold, you don’t know how much money you’ve got to work with. By selling your home first, you avoid the extra stress, you will know exactly where you stand financially and you can purchase with confidence.
2. DON’T DISCOUNT THE OPTION OF STAYING PUT
Often the most favorable outcome can be to stay put in your current home. It means your main asset remains intact, social security entitlements are unchanged and you avoid the stress of moving. Obviously, for this option to be viable you need to be open to the idea of bringing in external help around the house. You’ve probably been used to cooking, cleaning and attending to odd jobs yourself but an open mind and some flexibility will be required to make this option work. You may also need to make some physical adjustments around the home to aid mobility and safety.
3. DON’T SIGN THE CONTRACT UNTIL YOU HAVE SOUGHT ADVICE
This is especially important when it comes to retirement villages. During the 2011/12 financial years, Consumer Affairs Victoria received more than 500 enquiries about retirement villages, including queries about contract terms and fees. The contracts are complex to ensure you have a professional look over them prior to signing anything.
Wally David, CFP®
Financial Planning Matters
From Financial Planning Association of Australia