When most people hear the word “downsize” they think of a smaller home with a cheaper price tag. But Downsizing isn’t about living in a tiny home – unless you want to – in fact, it’s not about square metres at all! It’s about having the right sized home for the next exciting chapter of your life!
Sure, sometimes the home and the garden (or at least the bit you need to look after) are smaller, but sometimes they’re not. Sometimes you still have 3 bedrooms, 2 bathrooms and a double garage. And sometimes the price tag isn’t necessarily less. Like most property transactions it will depend on the location, the home you choose, any upgrades like benchtops and appliances or extras like boat, caravan or wine storage.
And here’s the thing, while lots of people see a financial benefit in downsizing (you can put the money left over into your investments) if you’re getting an Age Pension you could find that the bigger home, the better location, with the upgrades (or even all 3) could actually be more affordable.
You see, when it comes to calculating your Age pension, your home is normally an exempt asset, so when you sell your home you are selling an exempt asset. Of course, when you buy your new home you are buying an exempt asset too. The problem normally comes from the difference in the values, if your new home is cheaper than the one you are selling you can find that you downsize your pension when you downsize your home.
That’s why Supersizing your Downsize can be a good idea, yes, getting the house you really love can actually be a more affordable option.
Let’s look at an example.
Pam is downsizing from her home worth $900,000, she currently has $200,000 in her investments and $20,000 of personal assets. Pam is considering two different homes in a Land Lease Community. The first is a 2 bed, 1 bath home while the other has 3 beds and 2 baths. The first home is $125,000 less and doesn’t have as much space as she would like while the other home would be ideal and has plenty of space for her and the grandkids (when they come to stay).
As you can see, in either case Pam will keep her pension and remain eligible for rent assistance, but if she supersizes her downsize by buying the home she loves she will receive around $9,750 a year more in pension.
Hanging on to at least a small pension can make good financial sense. Firstly, there’s the question of what you can earn on the extra money. Once your assets go over the asset threshold your pension reduces by $3 for every thousand dollars of assets per fortnight. When you hear it like that it doesn’t sound too bad but it means that for every $100,000 over the threshold your pension is reduced by $7,800/year - which can be a tough level of income to replace, particularly on conservative investments like bank accounts and term deposits.
Then there’s the other benefits that come from getting some pension like Rent Assistance (which can give you up to an extra $185 per fortnight) and the Pensioner Concession Card which can give a wide range of discounts on health care, medicines, rates, utilities, car registration and public transport (which could be worth thousands of dollars a year).
Rachel Lane is author of Downsizing Made Simple with fellow finance expert Noel Whittaker, the new edition is now available to pre-order online. The companion website is there to guide your downsizing journey with great information, tools and easy-to-use resources.