Downsizing in retirement

If you're thinking about selling your home and downsizing, consider the pros and cons. Check if selling your home affects your government benefits.

Pros and cons of downsizing your home

Weigh up the pros and cons to decide if downsizing is right for you.

Pros

• Increased cash flow — Downsizing could free up money to pay off debts, such as your mortgage, invest or spend.
• Easier to maintain — A smaller place takes less effort to clean and maintain.
• More convenient — You can choose a layout and fittings that better meet your needs, or a location closer to family, transport and services.
• Lower household costs — In general, a smaller and more efficient home may help to reduce household expenses, such as utility bills or maintenance costs.

Cons

• Less space — A smaller place means less space for things, so you may have to make some hard choices when it comes to possessions.
• Less flexibility — Your new place may have less privacy, fewer guest rooms, or less space for entertaining.
• New neighbourhood — It may take time to adjust to a new area or to find new health care and other professional services.
• Emotional connection — Your family home may be full of memories, which can make it difficult to let go.

Consider the costs and your needs before you downsize

Take the time to consider the kind of home that suits your lifestyle, level of independence and budget in retirement. If you move from a house to a unit or apartment, you may have new costs like strata and body corporate fees.

If you decide to move, some of the moving costs to consider include:

• buying and selling in the same market
• real estate agent fees
• stamp duty
• legal fees
• furniture removal

See buying a house for more information.

Alternatives to downsizing your home

If you decide to stay in your home, alternatives to downsizing include:

• Renting out space — Consider renting out a room or taking in a boarder.
• Converting to dual occupancy — See if you can convert your home so that you live in one half and rent or sell the other half.
• Considering equity release — Explore whether a reverse mortgage or home reversion may suit. There is risk involved and a long-term financial impact, so get independent financial advice first.

Before going ahead with any of these options, check the tax impact and whether it will affect your government benefits.

Impact on the Age Pension or other government benefits

Your eligibility for the Government Age Pension depends on the:

• assets test (value of your assets)
• income test (income you receive)

If your home is your principal place of residence, it is not included in the assets test. When you sell your home, the portion of proceeds used to buy, build or renovate another home is exempt from the assets test for up to 12 months.

A portion of the proceeds is included in the 'deemed income' — this is the income deemed to have been earned on your home as a financial asset. This may affect the amount of government benefits you get.

See Age Pension and government benefits for more information and consider contacting Centrelink to talk it through.

What to do after you downsize

After you've sold your home, you have options for what to do next, including:

• Invest the proceeds — Consider investing any extra money into an income-producing asset. See how to invest to explore your options.
• Get help if you need it — Government services like the Commonwealth Home Support Programme can help you to live independently and assist with daily tasks like shopping, cleaning, personal care or home maintenance. See aged care for more options.

Get independent advice before you go ahead

Before you downsize:

• Consult a legal professional to review sale contracts and oversee settlement.
• Get independent advice from a financial adviser about options for investing your sale proceeds.
• Ask the Services Australia Financial Information Service how it will affect your pension or government benefits.

Mary sells the family home

Mary is 67, owns her home, and is considering downsizing. She expects to sell her home for $800,000. She wants to buy a small apartment for $500,000 and have $300,000 left to invest.

Before selling, she contacts Centrelink (Services Australia) to ask how it will affect her Age Pension. A Financial Information Service officer tells her the $300,000 will be included in the assets test. The proceeds from selling her home will be assessed as deemed income and included in the income test.

As a result, Mary's Age Pension payments will reduce by a small amount each fortnight. 

Mary decides to go ahead with downsizing because, even though it will reduce her Age Pension, she'll be more financially secure.