Downsizing Clinging on to the family home even though your finances are tight? This is what you should consider, writes Michael Hutton.

You own the family home, are enjoying retirement and your children moved out years ago. But your home is showing signs of wear and tear, and you are struggling physically and financially to maintain it. Perhaps now is the time to consider downsizing to a smaller property and rearranging your finances.

You’ve long resisted the urge to move to another property – whether that be downsizing to a smaller home or moving into an aged care facility. Spending your twilight years in the family home has been the goal. It’s not just a property you own – it’s your home, full of family memories and a haven for spending quality time with children and grandchildren in the years to come.

Unfortunately, the sentimentality of the family home may conflict with financial reality.

You are not alone. There are many older people across the country who are living alone or with their partner in valuable, equity-rich family homes. While they may be living in a property worth millions of dollars, they are living frugally – the classic asset-rich, cash-poor dilemma.

Another scenario may be that you also have minimal investment income and are perhaps relying on the government age pension to finance your daily life. You’ve realised that properties don’t remain pristine on their own. You need to spend time, money and effort on upkeep, otherwise it can become poorly maintained or, in some cases, dilapidated.

If you can relate to all or even part of this scenario, you could probably live a more comfortable life by downsizing.

Should you decide to put sentimentality aside to sell the property and move into a smaller but more manageable and lifestyle-appropriate property, you might have a large sum of money left over to invest in other things.

If that’s the case, you may be able to contribute up to $300,000 for each partner into super as part of the downsizer contributions scheme, while the remaining balance could be invested in a personal investment portfolio.

If you are under 75, you might be able to put a further $330,000 (indexed) each of non-concessional contributions into super.

Your financial situation will then be much more liquid, meaning you’re better able to spend your hard-earned money living out your preferred lifestyle rather than having it tied up in a single property.

With the recent increase in income thresholds to $90,000 for singles and $144,000 for couples for the Commonwealth Seniors Health Card, you may still qualify for this valuable concession. Admittedly, though, you may end up missing out on the age pension because of the assets test and your new investment position.

Consider a widow living in a run-down, four-bedroom Sydney house worth $4 million. She might consider selling the house and buying a pristine $2 million apartment instead.

Of the remaining $2 million, perhaps $300,000 or more could be placed into super and the remaining $1.7 million or so invested into a personal investment portfolio of liquid investments such as shares and managed funds. If she drew from the portfolios at 5 per cent per annum, that would equate to $100,000 a year to spend.

In this scenario, minimal personal tax will likely be incurred after franking credits and capital gains discounts are taken into account.

Additionally, there will be much more cash to live on than relying on the government age pension of about $26,000 per annum for singles and $40,000 per annum for couples. This would also remove her from the government system and the need to routinely provide information. Stringent Centrelink gifting restrictions would no longer be applicable.

Not only that, but she might find herself living in a property that is much more pleasant and manageable in terms of upkeep. In this example, wealth has been rearranged from 100 per cent lifestyle (and illiquid) to 50 per cent lifestyle and 50 per cent investment (and liquid). This is a much better ratio.

Through downsizing, you’re more effectively able to address both financial and lifestyle considerations.

While you might be saying goodbye to the home in which so many meaningful memories have been made, you are also freeing up the property for a young family for whom it might now be better suited.SI

Michael Hutton is wealth management partner at HLB Mann Judd Sydney.