As the baby boomer generation starts to hit retirement, many empty-nesters will begin having conversations with financial and legal advisers, and it is always a smart idea to plan well ahead.
Financial and legal advice can encompass a range of issues for pre-retirees, including planning your retirement, how soon you can stop working or afford to move to part time work, your will, your superannuation savings, whether you will be eligible for the age pension - but one thing that’s going to be of central importance in these discussions is the family home.
As one of the most valuable (and sometimes the only) assets of baby boomers, many people are concerned about how their home can be used to supplement their lifestyle needs in retirement and later divvied up among loved ones as part of their estate. This can be especially important among blended families when things can get complex.
A critical issue for empty-nesters to consider is how to use their home to help fund their retirement.
Grow your super through downsizing
On one hand, the family home is a tax-free asset and it can make good financial sense to downsize in a bid to access substantial home equity that may have been built up over decades of ownership.
Part of the appeal of downsizing is that the proceeds of a family home can now be added to super, with new rules about to commence next month. See our previous news articles on this topic.
In a nutshell, from 1 July 2018, home owners aged 65-plus can use proceeds from the sale of their home to make a downsizer contribution of up to $300,000 to their super. It’s a non-concessional contribution so it won’t be taxed and it won’t count towards contributions caps. Each member of a couple can contribute up to $300,000 individually, meaning it’s a strategy that can boost super savings by as much as $600,000 for a couple.
Of course it is essential to seek personal advice from a qualified financial adviser to see how this scheme - or other Government schemes targeting downsizing babyboomers - may apply to your situation, and whether it will affect your age pension eligibility.
The key is not to be overly sentimental about a valuable asset that frankly, can be used to fund a high quality retirement lifestyle. Too many of our parent's generation lived a frugal lifestyle, where their home had grown enormously in value, they were asset rich but cash poor, subsisting on the age pension, struggling to maintain the home, but determined to retain it to pass on as an inheritance for their kids.
This generation of babyboomers is very different to their parent's generation - they have a raft of options available to realise the value locked up in the family home, and having access to a good standard of living and an aspirational lifestyle is definitely paramount in their retirement planning.
Downsizing can provide a more liberating retirement
Retirement planning goes well beyond money. If a large family home is holding you back from realising dreams of a new lifestyle, or travel, it could be time to get serious about downsizing.
The early years of retirement, when people are physically in good shape, is the time to embrace travel opportunities, and that can be a compelling reason to downsize at an early stage. Downsizing early while people are younger and fitter and keener to socialise with new neighbours makes the whole transition easier. In fact, when people first retire, after the kids have left, many people get a new lease on life and a new found love of socialising - liberation after years of work, paying off the mortgage and bringing up kids.
We've all seen the elderly parents who stay in their own home far too long, becoming more socially isolated as the years pass, making it a difficult and traumatic move when they eventually get to the stage where frailty, injury or illness means they can't return home.
Interestingly, there is plenty of research showing many empty-nesters and retirees are eager to downsize. The key hurdle is often confusion over the process, how it works and what impact downsizing a home will have on retirement incomes. It's a complicated decision making process, needing specialist legal advice, financial advice and consultation with the extended family in many cases. People can become immobilised and feel overwhelmed by the choices, and fear making the wrong decision. The default position becomes to do nothing, and stay in the current home for longer, if people don't feel confident about being able to get good advice and make the right decision.
Downsizing is a big step, no doubt about it. But backed by good financial and legal advice, it can also be a smart move that allows you to enjoy a more prosperous and liberating retirement. The key is to seek out good advice, well ahead of time - and be prepared. After all, you never know if your job will end sooner than expected - or when the housing market will deliver that windfall sale, to deliver your dream retirement lifestyle.
With the right advice, you might well be able to afford to retire and enjoy the good life you've earned, sooner than you think!
Amanda Graham is the Co-Founder and Co-CEO of Downsizing.com.au and SeniorsHousingOnline.com.au