Choosing to downsize your home for retirement is a momentous decision, but it can be a very exciting process if managed well. It’s a financially savvy strategy that also gifts you more time, the greatest commodity of all. Remember that downsizing doesn’t mean downgrading. Lovingly pruning two rose bushes can be just as fulfilling as tending to ten.
Rands and sense
Probably the most significant reason to downsize is to release capital from which you’ll be able to draw an income during your golden years. In the process, you’ll also cut back on home maintenance expenses – thus creating yet more retirement income.
Why pay for space that you and your family no longer require? You may well be wasting money on unnecessary council rates, electricity, water and home insurance. If you plan to travel more (as most of us do during retirement), a smaller, more affordable home may make a lot of sense.
The value of time
When investing for retirement, we love to discuss the value of time and the importance of time in the market. Once we retire, the conversation often revolves around the lack of this precious commodity and the need to allocate it very carefully towards meaningful activity. We need time to acquire new and interesting knowledge, to explore new places and most importantly to help and enjoy our children. This is what downsizing allows…
On the flipside, you do have to allow some time to implement the process of downsizing. You may not have immediate access to the additional capital as the property market may be slow (as it is now) and you may have to face the realization that your home isn’t worth what you think it’s worth. What’s more, you’ll also need time to find the ideal retirement property.
That said, it’s important not to leave the decision too late. We all need to acknowledge that our energy levels wane as we approach retirement, and the process of downsizing – including getting rid of unnecessary clutter and packing up – is a tough physical business. Also, it’ll probably be easier to deal with the emotions that are tied up with the move if you’re younger.
The costs of the move
Before you do anything, factor in all the costs of downsizing to ensure that the potential capital release is sufficient to justify the big move.
- You’ll need to pay capital gains tax on the gain, but fortunately, there’s an exclusion on the first R2 million gained on your primary residence. Thereafter, 40% of the gain will be added to your annual income and taxed at your marginal tax rate.
- Transfer duty is based on the value of the home you purchase (view rates here). This cost can be more significant than capital gains tax and may warrant considering a home in a new development where transfer duty doesn’t apply.
- The actual selling cost includes sprucing up your existing home (perhaps even modernizing the kitchens or bathroom?) and moving. What’s more, estate agents’ fees range between four and seven percent plus VAT on the selling price.
How to invest the balance
Once you’ve decided that downsizing is the way to go, it’s vital that you draw on our expertise as your financial planners. We’ll gladly assist in the decision-making process and once the move’s been made, we’ll review your overall retirement asset allocation and select the Kanan Wealth portfolios which offer the perfect combination of wealth preservation, growth and income to ensure that your retirement years are truly golden. We’ll typically rely on:
- An 80% allocation to our Stable Growth fund which assumes a medium level of risk in a spread of local equities and is ideal for investors who need income longevity with an inflation edge.
- A 20% allocation to our Special Opportunities fund which assumes a higher level of risk in local equities and provides the extra growth required for the long term.
Based on historical data and assuming the current inflation rate, this combination has yielded an annual return between of 8 and 12%.
As well assisting you to invest the additional capital, we’ll discuss safe drawdown rates to ensure that your capital lasts. You may be familiar with the so-called “4% rule” which states that if you withdraw 4% from your wealth portfolio annually (adjusted for inflation), your savings will last for 30 years (assuming an equal split between equity and cash-based investment). But we’d love to discuss how the rule applies to your unique situation.
Alternatives to downsizing
You may want to rent out part of your home using a rental platform such as Airbnb. You’ll benefit from the additional income and the tax deductibility of the rental expenses, but you will lose the opportunity of additional time – that most precious retirement commodity. You’ll still be liable for maintenance, may have to deal with tricky tenants and your income won’t be consistent.
A more drastic alternative could be to sell your home and choose to rent in retirement. This could reduce stress as you won’t be liable for any maintenance, but you’ll be at the mercy of a landlord who may increase the rent above the inflation rate, sell or occupy the property. You’ll also lose exposure to property in your overall asset allocation and property won’t be part of your legacy.
The long and the short
Before you downsize you need to understand why you’re doing it. If your motivations are mainly financial, you need to be on top of all the numbers to ensure that downsizing has the desired effect. If it’s more of a lifestyle decision, be sure to take the time to choose correctly and visualize your ideal retirement: is being close to the beach more important than being close to the grandkids, for example?
Whatever your motivations, give yourself the time and space to make the right decisions. Done right, downsizing and decluttering can be a cathartic experience which acts as the cornerstone of a long and happy retirement.
