Downsizing Your Home for Retirement

Your home may be your biggest asset, and for many New Zealanders, downsizing (selling the family home and buying something smaller) is a key retirement funding strategy. The concept is straightforward but the decision is significant, involving both financial calculations and emotional considerations that deserve careful thought.

The Downsizing Logic

The basic idea is simple: sell a larger, more valuable property and buy a smaller, cheaper one, with the difference going into your retirement savings. For example, if you sell your family home for $1,200,000 and buy a townhouse for $800,000, you have $400,000 in net proceeds for retirement. That capital could generate $16,000 to $20,000 per year in investment income, significantly boosting your retirement finances and reducing dependence on NZ Super alone.

When Downsizing Makes Sense

Downsizing often makes sense for both financial and lifestyle reasons. From a financial perspective, it works well when you need capital for retirement income, when maintaining a large home has become expensive, when rates, insurance and repairs are straining your budget, or when your home has increased significantly in value over the years you have owned it.

Lifestyle factors are equally important. If the home has become too large for your needs now that children have left, if gardening and maintenance are becoming difficult to manage, if you want to be closer to services or family, or if a lock-up-and-leave lifestyle appeals so you can travel or spend time elsewhere, then downsizing could improve your quality of life as well as your finances.

When Downsizing Does Not Work

Downsizing is not the right choice for everyone. Property market factors can work against you: smaller homes in your area may not be much cheaper than what you currently own, transaction costs eat into the proceeds significantly, and moving to a cheaper area means leaving your established community and support networks.

Personal factors matter too. You may have a strong emotional attachment to your home that makes leaving painful, your current home may be suitable for ageing in place with good accessibility, you may want to leave property to your children, or grandchildren may visit regularly and need the space your current home provides. All of these are valid reasons to stay put.

The Real Numbers

Downsizing is not free, and the costs can be substantial. Real estate agent fees run 3 to 4 percent of the sale price, which means $36,000 to $48,000 on a $1.2 million sale. Legal fees for both the sale and purchase transactions typically total $1,500 to $3,000. Moving costs run $2,000 to $5,000 depending on distance and how much you are moving. You may need to spend $5,000 to $20,000 on new furniture and appliances if your existing items do not suit the new space, and renovations to make your new home suitable could add more. These costs reduce your net proceeds significantly, so a $400,000 price difference might yield only $300,000 to $350,000 after all costs are accounted for.

Location Decisions

Where you move is one of the most important decisions in the downsizing process. Staying in your current area means keeping your community connections, accessing familiar services, and remaining near friends, but property prices may be similar to what you are selling and options may be limited.

Moving to a cheaper area frees up more capital and might offer a better climate, but you will be away from your support networks, dealing with unfamiliar services, and potentially facing isolation risk as you age. Moving closer to family means support will be available as you age and you can see grandchildren regularly, but it may not be your preferred location and family situations can change over time.

What To Buy

A townhouse or unit offers low maintenance and is often located in complexes with body corporate management. These properties may have age restrictions if they are part of retirement villages, and they suit a lock-up-and-leave lifestyle well. Apartments offer minimal maintenance and body corporate handles building upkeep, though fees can be high. Lift access is important to consider for future mobility needs, and the living space is typically smaller than you may be used to.

A smaller house lets you keep a garden if that is important to you and provides more space for visitors, though maintenance is still required and you may not free up as much capital as with a unit or apartment. Retirement villages are purpose-built for older residents with services and social activities included, but fee structures are complex and capital may be tied up in ways that limit flexibility.

Tax Considerations

Generally, selling your main home is not taxable in New Zealand due to the main home exemption. However, if you bought with intention to sell, income tax may apply even if it is your main home. The bright-line test (2 years from July 2024) generally does not apply to your main home, but complex situations like renting out part of the property may affect this. Get tax advice before selling if your situation is complex or if there is any uncertainty about your tax position.

Timing The Move

Getting the timing right matters. Moving too early means you may regret losing the family home, property market changes could affect your position, and you lose space for family gatherings while you still want them. Moving too late means you may not be able to manage the move physically, a health crisis could force a rushed decision under pressure, and you miss the opportunity to enjoy your retirement funds while you are still active.

Many people find their late 60s or early 70s is the right time for this transition. You are still mobile enough to manage the move and settle into a new home, but you have enough retirement years ahead to benefit from the freed-up capital.

Emotional Considerations

Leaving a family home is emotionally significant and deserves acknowledgment. Give yourself time to process the decision rather than rushing into it. Sort belongings gradually rather than rushing the decluttering process. Take photos of your home and keep meaningful items that connect you to your memories there. Plan farewell gatherings with family and friends to mark the transition properly. Focus on the positives of your new situation rather than dwelling on what you are leaving behind.

It is okay to feel sad about leaving your home. These feelings usually ease once you settle into your new place and start creating new routines and memories there.

Alternatives To Downsizing

If you want to stay in your home but need retirement capital, alternatives exist. Home equity release lets you borrow against your home while continuing to live there, with the loan plus interest repaid when you eventually sell or pass away. This lets you stay in your home but interest compounds over time, reducing the eventual estate.

You could rent out part of your home by taking in a boarder or converting to a granny flat situation. This provides income without moving but means loss of privacy and taking on landlord responsibilities. A reverse mortgage is similar to equity release with different structures, so compare products carefully before committing.

Making The Decision

Downsizing is not right for everyone, and this is one of the biggest decisions of retirement. Before committing, ask yourself whether you actually need the capital, whether the proceeds will make a meaningful difference to your retirement lifestyle, whether you are emotionally ready for the change, whether you have explored all the alternatives, and where exactly you would move to. Take your time with this decision. There is no prize for rushing, and getting it right matters more than getting it done quickly.