MAKING MONEY | Downsizing as a retirement plan

Sea or tree change? Downsizing to a coastal town or regional hub can hold lifestyle appeal but don’t bank on it to fund your retirement.

Super industry body ASFA recently found downsizing for a sea or tree change has the potential to free up valuable home equity. As a guide, sea changers moving from the Sydney metro area to Forster-Tuncurry could pocket up to $650,000 in home equity thanks to the difference in median home prices.

There are drawbacks. Choosing to live outside our big cities can make it harder to access specialist medical care – something that becomes more important as we age. In addition, property price growth in state capitals tend to outpace regional areas. This matters because you may need to rely on home equity to fund the rising cost of aged care.

Downsizing within the same city often provides fewer financial benefits than a sea or tree change. Property transaction costs will eat a substantial chunk of your home equity. The bottom line is that relying on the value of your home should not form the focus of your retirement plans.

If you’re eager to cut housework or garden maintenance, downsizing can be a good option. But if you want to fund a decent retirement, it makes more sense to grow a separate pool of investments – preferably throughout your working life.

This strategy gives you choices. If you don’t want to sell a much-loved family home, you don’t have to. And if a more compact home is on your retirement radar, you can afford to do it on your own terms, moving where and when you choose.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.