Downsizing – when is the right time?
Should I be thinking about downsizing the home prior to retirement or hold off and take advantage of any future potential increase in value?
For a lot of people the family home represents a large portion of the households wealth. However unlike a normal investment, this asset provides both financial benefits and also can hold strong emotional ties.
Sometimes making hard financial decisions with a valuable asset like this can often make the decision making process a little more difficult, and the emotions can also cloud one’s judgement.
We often come across pre and post retirees facing the dilemma of:
“Should they retain the family home so that they take advantage of any potential future increase in value…… or should they sell the family home and downsize to enable them to deploy the capital into super or an investment strategy that positions them for retirement?”
The answers to these decisions are never easy.
The family home unlike other asset classes is not unitised, in that you can’t simply cut off a room and cash it in if you are a bit short for funds. So it really is a case of either selling it in its entirety or retaining it.
When thinking about retirement, people often consider their capital growth. For some, due to the size of the asset, they think of this growth in terms of a dollars rather than percentage based returns. This can often cloud the judgement and decision making process as we believe it important to always bring back the financial return to a percentage based performance. This allows you to then accurately assess the performance in contrast to other asset classes.
For example, $100k growth on $1 million is 10% growth and $1k growth on $10,000 is also 10%. It is important to notice the return is the same despite one of the asset sizes being a lot larger. This can easily distort facts to the retiree whereby some would say that the $1 million dollar investment is better than the $10k, when in actual fact they performed the same as a percentage return. So it is really important not to loose focus on that core return – rather than just saying my property has gone up by $X amount of dollars.
Generally when we evaluate this type of decision with our clients, we not only try to think about what the asset has provided in terms of financial returns, but also what it might possibly do in the future.
There are always a large number of variables which need to be considered too so seeking financial assistance in this difficult time is highly recommended. Once thoroughly thought through and the above steps followed, it can be a positive life changing event.
Like all big decisions in life and in financial planning, it is important to seek professional guidance and we would of course recommend our expert team of advisers at AJ Financial Planning.