Many homeowners who have struggled over the years to pay off their mortgages may be tempted to regard their home as a source of capital to help finance their retirement.

And as baby boomers near or enter retirement in burgeoning numbers, more people are likely to wonder whether eventually moving to a smaller home may give their savings a much-needed boost.

Certainly, a large family home may suddenly seem too big after the children leave home.

But how realistic is it for retirees to look upon their home as a possible source of capital to partly finance their retirement?

While Australian's do not pay capital gains tax (CGT) on their main residence, the cost of real estate agent's commission to sell a current home and stamp duty on a new home can really take their toll. And the real estate market often does not move in the vendor's favour.

In short, it costs a lot of money to change houses.

Many downsizing homeowners may find that the difference between the price achievable for their larger existing home and the cost of a smaller home may not be as great as envisaged.

The Wall Street Journal this month published an article, Everybody says you should downsize. Everybody may be wrong , querying whether moving to a small home upon retirement is likely to produce a financial bonanza.

The article by Anne Tergesen opens with the observation: "The McMansion generation is in downsizing mode."

Tergesen then quotes financial planners, retirement research and retirees about the potential fallacies of relying on a shift to a smaller home in an effort to provide retirement capital.

"Don't make any broad assumptions that downsizing is going to save your retirement," one financial planner advised. "It may help your finances, but I've seen plenty of people who find that it doesn't pan out as they had thought."

The article refers to a study by Boston College's Centre for Retirement Research into the experience of older homeowners who moved to smaller homes following financial setbacks. On average, they spent almost all of the proceeds from the sale of their larger home to buy a smaller property.

If retirees own their homes, it can make a key difference to their spending patterns and lifestyles in retirement. But this is, of course, a different matter from holding out the hope that downsizing a family home will provide a valuable injection of retirement capital.

The Association of Superannuation Funds of Australia (ASFA) bases its calculations on how much annual income is needed to have a "modest" or "comfortable" lifestyle in retirement on the assumption that the retirees own their homes. (See the ASFA retirement standard )


By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
10th  December 2012