Single, and worried that you’ll never be able to retire?
This series of posts will show how careful consideration of your options and finances can show you the path to a comfortable, safe and solo retirement.
Be sure to subscribe to make sure you don’t miss any of Tracey’s story.
Now, Where Were We?
At the end of my last post, we had:
Worked with Tracey to find out what she wants from her retirement.
Clarified what Tracey’s going to need to make that retirement a financial reality.
Started working out if Tracey’s on track to get there.
Run headlong into Tracey’s big financial problem – that mortgage.
Introduced the idea of selling the house.
It’s this last point where we decided to stop because, frankly, it’s a big topic and we were nearly 2,000 words down already…
So let’s circle back to Tracey’s second option for clearing the mortgage.
Option 2 – Selling the Home
Owning your home in retirement is going to dictate your experience of retirement.
Not only will you have the comfort of knowing the roof over your head is safe, there are some handy financial benefits (you won’t pay capital gains tax when you sell it, Centrelink don’t count it when assessing your Age Pension entitlement, etc).
It’s also a huge factor in how your Aged Care experience will play out, but we’ll talk about that another day.
There are some negatives, of course – you have all those ongoing costs that come with owning a house, plus those years of missed maintenance can conspire to empty your wallet every couple of years.
Yet, on balance, owning your home when you retire is a good thing.
But – it doesn’t have to be the same home you’ve always owned.
I’ve written before about the issues people need to confront when they realise the house they’ve raised their family in is no longer suitable for their needs.
It’s an important, emotional decision with heavy repercussions.
There’s also a financial element that must be considered. And that element has been boosted along by this lengthy and contagious boom in residential property prices.
If somebody who has ridden the property boom on the way up can cash out and take those proceeds to buy a smaller, cheaper home, it can absolutely transform their finances.
Take Tracey as an example.
She and her ex bought in an area of Melbourne (Ashburton) that has seen tremendous growth over the last 20 years – over 1,000 per cent since 1996.
Which is how Tracey has ended up with a home worth $1.2m – a figure that still surprises her, all these years after buying it for “around $200,000”.
If – and it’s a big if – she can sell it and buy another home that better meets her needs for around $700,000, she’ll be left with enough money to:
Clear the mortgage
Increase her savings
Put some towards her retirement.
But is this what she wants?
Money Isn’t Everything
While the numbers can stack up rather handsomely, there’s an important factor that’s often ignored in this discussion – do you even want to do it?
Many people dread the idea of leaving their family home. For those people, this discussion must then become about what avoiding that dread is costing them.
In Tracey’s case, if she were possessed with an overwhelming desire to keep the house, she would be accepting that doing so means she’ll have a much smaller nest egg in retirement. This will mean that she’s accepting a smaller ‘buffer’ to support her as she gets older.
It will also likely mean a lower level of free income through retirement, and that’s without considering the additional maintenance costs she’ll be up for by holding on to a bigger house.
Now there is nothing wrong with this.
So long as it’s a conscious decision Tracey’s making, with a fully informed acceptance of the trade-off’s she’s making. Because money isn’t everything. Being comfortable in your own home can be more important than having a big nest egg for a rainy day.
But it has to be a conscious decision – this is too big a decision to make with your head in the sand.
Because beyond these financial ‘costs’ is the emotional drain that can come with permanent nervousness about how long your money will last.
Not Tracey, Though
Of course, Tracey doesn’t particularly want to keep the house.
It’s too big, takes too much work and consumes too much of her time and money. The kids have (finally…) left and she’s worked through the emotional impact of what leaving would mean.
Now, for Tracey, it is (largely) about the money. So let’s look at the financial side now.
Let’s say Tracey sells her place for $1,200,000.
After paying the agent 2%, plus another 2% in ‘other costs’, she’d end up with $1,152,000 in her pocket.
Out of that, she needs to:
Clear her mortgage
Buy a new house to live in
Top up her savings
Put some money towards her retirement
So, after clearing her $230,000 mortgage, Tracey would be left with $922,000.
Of this, she could spend the entire amount buying her new place if she wanted to.
But given her goals are to have a comfortable retirement as well as downsize to a house that’s easier to manage, this wouldn’t tick both boxes.
What Tracey Really Wants
Instead, Tracey could look at buying a unit closer to her daughter Louise (or, more accurately, near her 5-year-old grandson, Lawrence), who lives in Oakleigh.
While only a few suburbs away, it can still take Tracey 15-20 minutes to get there.
So Tracey’s keen to explore other options, even though she’s not really fussed about the house itself. Because Tracey doesn’t want a new house for the sake of having a new house.
She wants what it can give her:
Time with Lawrence.
The powerful feeling that she’s there to help Louise whenever, and however, she needs it.
Getting back a few hours every month that she’s currently spending cleaning, vacuuming and mowing.
Room for her grandkids to sleep over when they’re ready.
Confidence that it will be suitable for her as she gets older.
Throw in the reality that buying and selling in the same area would probably consume all of Tracey’s net proceeds from the house, and moving to a different suburb becomes very appealing.
Let’s Get Specific
Also, while the growth in the Oakleigh area has been similarly turbocharged, there are two factors that mean that Tracey might be able to spend less money moving to the area:
That stratospheric growth was off a lower base and
There seems to be more multi-dwelling developments in that area than Ashburton.
All of which means that Tracey’s chances of finding a unit that meet her requirements:
3 bed/2 bath for when Lance and his family visit.
Small yard for her pot plants.
10-minute drive, at most, to Louise’s house.
Costs no more than $700,000, all-in.
With a median unit price of $650,000, in fact, Oakleigh becomes a great spot for Tracey to look and, after a few months, she finds a unit in her budget.
(Quick sidenote – for those already on the Age Pension, Centrelink allow 12 months grace after you sell your house before they start counting the proceeds in your assessment, which gives you enough time to find a new home without losing your Age Pension).
Tracey can take the net proceeds from the sale of her Ashburton house – $922,000 – and spend $700,000 on the new unit.
This leaves her with $222,000.
After paying $37,000 in outrageously inefficient Victorian stamp duty, and another $10,000 in additional costs, Tracey’s left with $175,000.
Well, she has a little more than that:
A new house that’s much more suited to what she needs in her life now.
No mortgage (for the first time ever in her life, incidentally).
$175,000 extra in the bank.
Are We Back On Track?
Remember that in our last post, we worked out Tracey needed $500,000 in net (i.e., after debt) assets to live a comfortable retirement.
And that keeping the house meant that she wasn’t on track to have that because she’d either have to keep making $16,900 a year in mortgage repayments OR use a massive chunk of her super to clear it.
Well, downsizing her house like this changes that.
Now, instead of having to use her super to clear her mortgage – compromising her financial future – she can leave her super to grow towards her $500,000 target, without a mortgage to worry about when she stops working.
Beyond this, she has an extra $175,000 to put towards her financial security.
In Tracey’s very specific circumstances, I think we can safely call this a great outcome.
When It Doesn’t Work
But, like anything else, sometimes this strategy doesn’t work.
For instance, buying and selling in the same market can undermine the benefits – especially if you’re buying a house that’s simply an upgraded version of what you had before.
The transaction costs – like agents costs when selling, stamp duty when buying – will chew up any of the cash left over swapping ‘like for like’.
So that approach isn’t about – indeed, it can’t be about – improving the financial picture, but is instead all about changing your living arrangements and hopefully not losing too much in the process.
And if your situation is drastically different to Tracey’s and the gap between your ‘comfortable’ and ‘likely’ retirements is too big, a change like this may not be enough to get you there.
But, again, that’s fine – everybody’s situation is different so, as per all the warnings I’m plastering on these things, be sure to get tailored, personal financial advice before deciding if this is for you or not.
Hang On, What Should Tracey Do With the Cash?
Well, that’s another big question that we’ll address in the next post! Because that question needs to be answered in tandem with one other big one. Namely:
What about Tracey’s super?