Smart downsizing to avoid common traps

As Australia's aging population becomes increasingly cash-poor and asset-rich, the option to downsize their properties becomes increasingly attractive.

Once the children have flown the coop, hanging on to the family home becomes needlessly expensive, especially in these days of skyrocketing gas and electricity prices.

Generally, the family home can be said to be “not fit for purpose” for couples approaching or in retirement. Maintenance can become burdensome, and cleaning can steal hours from your week.

With property prices rising 20% plus and achieving record levels in the past 12 months, this could be an ideal time to consider downsizing.

Many couples in late middle age have been using substantial profits on their homes to boost their retirement incomes. 

There's also a bigger social good at play. Australia is experiencing a shortage of family homes because of a recent trend for the Baby Boomer generation to “age in place” and resist the philosophy of downsizing. 

However, the recent price boom has persuaded many to move for the financial rewards. Analysis published by the website downsizer.com suggests there'll be a pool of 1.7 million Australians looking to downsize in the next five years.

While adopting this strategy makes sense at many levels, you must ensure you achieve your financial goals by downsizing. Get it wrong, and you could find yourself in no better position. So, it's important to discuss any move with your financial adviser.

We've highlighted the most common errors to avoid when downsizing.

Wishful thinking

It's easy to inflate the true value of your property. Be realistic about how much buyers will pay. Market moods change quickly. Seek advice from an independent valuer and a financial advisor to avoid flawed financial planning for your retirement.

Renovating to sell

Given that cash is king in retirement, it's probably not a great idea to splash out five figures on a new kitchen or bathroom to enhance the attractiveness of your home. Instead, spruce it up with some cosmetic improvements, but don't risk your cash at this stage in life.

Under-estimating costs

Do not assume every small property is substantially cheaper than your family home. When choosing a property within budget, do not forget to factor in the cost of any strata or management fees. Again, working with real numbers is important when planning your retirement.

Not considering fees

Selling a home can incur around 5% of its value in fees once you've paid the agent, the marketing costs, your solicitor and conveyancer, plus any bank fees you incur. It's not a small wedge of cash, so make sure you put these into your budget when downsizing.

NOTE: The information in this article is general in nature and provided as a general overview  only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.