How Much Should You Spend When Downsizing Into Retirement Living?

This article is part 2 of Downsizing.com.au's New Intelligence Series.

If you have owned your family home for 10, 20 or even 30 years, deciding what to spend on your next home can be very different from buying property earlier in life.

For many downsizers, the question is no longer simply:

How much can I afford?

A better question may be:

How much do I want to spend, and what do I want the rest of my capital to do for me?

Rachel Lane, Principal of Village Guru and a specialist in the financial aspects of retirement living and aged care, says many older homeowners have already experienced decades of capital growth.

Rachel has specialised in retirement living and aged care for more than 15 years and developed the Village Guru software to help consumers better understand the financial implications of moving into a retirement community. Village Guru

Rather than chasing another major property gain, many older homeowners are increasingly focused on certainty, lifestyle and finding a home that can work for the rest of their life.

That is an important distinction when property market headlines turn negative.

Nerida Conisbee, Chief Economist at Ray White, has examined what changing residential conditions mean for older homeowners. Ray White Economics

Her analysis shows that many older Australians hold substantial equity. For someone considering downsizing, the difference between the value of the family home and the cost of the next home may matter more than modest short term movements in property prices.

The latest PwC RLC Retirement Census shows why that difference can be significant. PwC RLC Retirement Census

Across Australia, the average two bedroom independent living unit was priced at around 61 per cent of the median house price in the same area

In Sydney Metro, the average two bedroom independent living unit represented just 49 per cent of the local median house price.

For some homeowners, that can mean releasing a substantial amount of equity when they move.

But how much capital you release is only part of the decision.

You also need to consider how much money you want to keep invested, your retirement income, Age Pension position, ongoing village fees, future care costs, estate planning and what you may receive when you eventually leave the village.

Different retirement living contracts can also produce very different financial outcomes.

The same person choosing the same type of home may end up with different levels of investments, income, ongoing costs and eventual exit proceeds depending on how they choose to pay.

That means the cheapest retirement home is not automatically the best financial choice.

Likewise, spending more upfront is not necessarily the wrong choice.

After decades spent building wealth through your family home, your next move may be less about accumulating more property wealth and more about deciding how that wealth can support the life you want to live.

The most important number is not simply the purchase price.

It is the overall financial and lifestyle outcome of the move.

Downsizing.com.au presents "New Intelligence Series"

1. 27,000 Australians Are Waiting for Retirement Living - What Does That Mean for You?
   

2. How Much Should You Spend When Downsizing Into Retirement Living?