Welcome back to start Here, the very special mini series within Sugar Mama's Fireplay, where I answer your real life money questions with practical, empowering steps to help you get started and have financial security and confidence in your life.

Now.

Today's question comes from a lady named Pamela, who wrote, Hi, Canna, I've been a stay at home mother for most of my life, but now I'm working part time at my local public school, so I only have seventy seven thousand dollars in super.

It's better than nothing, but I know that I need more money in my super if I'm going to be able to retire in three years time at age sixty five.

All of my money, except for eighty thousand dollars in savings, is tied up in my home, which is worth three million dollars and no mortgage.

So I'm considering downsizing to help free up some of this money in order to help cover my retirement needs.

So my question to you is what do I need to think about and know to help make this money last as long as possible for retirement.

Okay, First of all, Pamela, thank you so much for your message.

This is such an important and a really common question.

So many Australians nearing retirement are in such a similar position.

Their asset rich, you know, great home, no mortgage, but they don't actually have the cash flow in order to be able to support their retirement and support their retirement in the way that they want.

So in today's episode, to start here, I want to talk you through this thing called the downsizer contribution and how the rules work so that you can have a much clearer understanding as to how this may help you.

Also the practical and financial steps to take before you make any major decision, and also how much to estimate or how to estimate what you need in order to be able to free up and make this money last as possible.

And of course, with all of my episodes, everything is general in nature.

This is really for educational purposes and also to help give you that clarity to help you get started, So please always bear that in mind.

This is definitely not strategic advice or personal advice.

All right, let us begin, because this is a really important episode.

All right, let's not waste any time at all and get straight into this.

So why can downsizing the family home be a really smart financial move?

So when most of our wealth sits inside the family home.

Particularly there's no mortgage, it can be really difficult to actually generate any come once you stop working.

You know, the only way to earn money off a family home is if you say renting out, say a bedroom now downsizing that is obviously selling the home and buying something smaller and cheaper obviously helps release some of that equity and that money that you get left over.

The difference between selling the old home and buying the new home, you know, can help give you greater flexibility, It can help boost your super and potentially help provide you with money that you can help live off or even passive income to support your lifestyle.

It's not about losing a home, it's about turning part of that wealth that you've built into I guess accessible resources that can now work for you in a more financially efficient way when it comes to those retirement goals and dreams.

So definitely, by planning early, you can actually make a far more informed decision about when to sell and also how to sell, and you'll have such a greater idea as to what you actually need for your retirement goals and also how to make sure that you make that money really work for you in a really efficient way so that you can save tax and get that money lasting for you as long as possible.

So this is what I'm going to recommend you do.

I am going to recommend you do two budgets, so before you make any sort of financial moves, I really want to make sure that you have a really clear understanding on your spending.

So I recommend you do a budget for your living expenses right now, so work out what you actually spend your money on.

You know, it might be your food, transport, maintenance of the family home, car regio rates, absolutely everything.

Because this actually shows you what your life costs are right now, and it can be really helpful to give you a bit of an insight as to how much you're going to need going forward, especially when you retire.

Once you've done that, I then want you to do a future retirement budget, So we're going to start projecting forward now.

I want you to write down what your expenses might look like in three years time when you do go and retire.

And the reason why I want you to do this is because you have even more clarity as to any shifts either up or down with your income and how you actually need, so we can plan and prepare it around that.

So for example, you might think, well, look my family home.

At the moment, it's going to swing pool and a really big garden.

It's very expensive to maintain.

If I downsize, I'll probably buy a townhouse and apartment, I won't have those expenses anymore.

But also on the flip side, you might think, well, when I retire, I want to go traveling and see the world.

And you know that might involve say two international holidays a year and say two domestic holidays a year, So you need to factor this in your future retirement budget and also take into consideration healthcare.

You know, as much as we want to think that we're going to be fit, strong and healthy throughout our lives, the reality is is, you know, we may need to go and see a specialist, we may need particular types of medication, may need to even have to go overseas for some of that.

So take that into consideration, possible changes in the cost of healthcare and obviously medical advice.

And by having these two different budgets side by side, you can get a much greater sense as to how much income you're going to need or you actually want each year in order to be able to live comfortably.

Because then when we have that figure as to you know, for example, is it eighty thousand dollars year or seventy thousand dollars a year.

Having that figure as to how much you need to live off each year for your retirement goals and your retirement lifestyle goals, we can then work out, actually, how much money do you really need at age sixty five to achieve this?

So once you've done that, I wanted you to do some research.

Okay, before you even think about listing a property.

You want you to do some important groundwork and really understand your numbers with confidence and certainty.

So the first thing I would be doing is getting some appraisals.

Speak to at least three, if not five, local real estate agents to get a realistic market valuation of your family home.

You might think it's three million dollars, but an agent might come through and say, actually it's three point three or three point five.

There's a big difference in numbers here, or it might be two point eight.

You need to know because two three hundred dollars one thousand dollars up or down is a big amount of money.

That we need for your superinnuation and for your retirement goals.

And of course you know, by getting a range of different quotes, it's going to give you much greater idea as to how much your home is really worth and also how long it might may take to actually sell.

And of course you want to keep your head screwed on, you know, look for the conservative numbers, not a real estate agent trying to win you and win their win the business.

You know, don't just go with the highest estimates, because that can sometimes be fraught with danger and huge disappointment.

Okay, So once you've got a clear idea as to what you can realistically sell your home for, then I want you to go and do some research on the cost of your next home.

Look at what type of property you'd like to move into.

You know, if you're living in a big home, you might want still a house, a free standing house, but maybe it's smaller, or perhaps you want a townhouse, or perhaps you're quite happy with an apartment, you know, with all level one level living, or maybe you won't even buy into a different area.

You've got to look at what these properties are listed for, but also what these properties actually end up selling.

We all know that you know, a real estate agent will quote a property for say a million dollars, but it ends up selling not for a million dollars, it ends up for selling for over one point one.

So you want to look at the prices these properties are actually selling for, not the advertised prices, because they can be a little bit misleading.

You also need to factor into your numbers the costs, so things like stamp duty, you know, legal fees and those moving costs.

They can really add up, particularly stamp duty.

Then I also want you to do some numbers around the costs of selling.

When you go to sell your family home, you're going to have to pay agents commissions, which is going to be a lot on a three million dollar home.

You know, you can be writing a big check once you sell it, so that's got to come off your top line.

You're also going to have to pay for marketing, you know, a photographer to come through, someone to probably style the home.

You might even have to rent some furniture, you might even have to move out temporarily.

You might have to do some you know, improvements to the home.

You know the agents might come through and say, look, you need to spend twenty thousand dollars fixing up the garden and the fences, or you need to get the house painted, or you need to get the bathroom touched up.

And then of course you're going to have legal fees as well.

Now, all these expenses can quickly add up.

Selling is expensive.

No one really talks about this, And of course when you have all these numbers, you can then subtract these from your estimated sale price to see exactly how much money will you be walking away.

Is it three million dollars, is it three point one million dollars?

Is it two point seven million dollars?

You want that clarity.

And then of course you can compare that expected sale price with your possible new purchase price and all those associated costs that come with it, and you have a much clearer picture of the net amount that's available for you to start putting towards your retirement goals.

All right, next, okay, this is where you need to understand how this downsizer contribution opportunity may work for you.

Now, the downsizer contribution is an incredibly effective way to help boost your super You know you've flagged it's Scott, You've got seventy seven thousand dollars in super so far and because you're aged over fifty five and you've sounds like obviously I'm not sure about this, but I'm going to assume this to be careful.

If you've owned your home for at least ten years, you can potentially contribute up to three hundred thousand dollars of the sale proceeds from selling your home into your superannuation.

Now, if you're a couple, it's actually three hundred thousand dollars each, So that would mean have a partner or a husband, you could potentially put six hundred thousand dollars into super so three hundred thousand dollars each.

But there are lots of finer details that come around this opportunity, so I'm going to focus on the top line ones, just to give you a bit of a background.

So the first thing is the property must have been your main residence, I should say at some point.

The second thing is, and this is an important one to be aware of, you have to make that contribution into super if you're going to use this downside a contribution window within ninety days of settlement.

So this is where people can get caught out they sell a family home, but then they take six seven months to find a new home.

In the meantime, that money sits in a savings account and they completely forget to do that important part of getting that money in.

So now that window has closed, they can't actually put their money into SUPER using this.

It's got to be ninety days within settlement.

Also, the other thing to point out is you only get one shot at this.

You can't do this in say three years time well obviously under current legislation.

So this opportunity for you to get a bonus three hundred thousand dollars into SUPER is once and once only.

So make this decision, and make it with confidence.

And I'll come to all with some more details in a part second.

And there's no upper super balanced limit that can actually stop you from doing this.

But from what you've said, I think you're okay within your your seventy seven thousand dollars limit.

Now, once that money is in SUPER, it's in what we call a low tax environment.

I think superannuation is a very powerful way to build assets in the long run.

So what that means is that three hundred thousand dollars with your existing seventy seven thousand dollars is being taxed at a maximum tax rate of fifteen percent, and capital gains tax can be as little as ten percent depending on how long it is how long you've held assets for.

Also, once you go to retire and you move your money from accumulation phase into pension phase, potentially that can drop to zero percent.

However, you've got to remember whilst three hundred thousand dollars is a very powerful boost and definitely one not to be disregarded, it may not necessarily close your entire retirement gap.

What I'm trying to say is that three hundred thousand dollars with your seventy seven still may not be enough to meet your retirement needs.

So this will then obviously depend on what your retirement income needs are, what you're spending is like, so you may still need to draw income from other investments or look at additional superannuation strategies in order to I guess help reach your ideal level of retirement comfort.

This is not, you know, a magical solution that's going to fix all of your retirement problems.

It definitely is going to help, but I'm warning you it may actually not be enough, So don't think Okay, this will fix it and take care of it.

I'm just going to simply use this and I'll be fine.

There's going to be more work and more advice required.

Okay, now I need to now let you, I guess, make sure you know and understand some key considerations and trade offs from doing this.

You know, before you go and sell, before you go and put money into SUPER, you need to be aware of the finer details that are actually could work against you.

So the first thing you really need to be aware of is the age pension eligibility.

So your family home isn't counted as an asset test in order to qualify for the age pension, which is the government pension.

So once the pro seeds are moved into SUPER, they now become accessible.

So you do run the risks depending on other contribution strategies that you may actually end up impacting your age pension entitlement.

It may reduce what you're entitled to or may wipe it out completely where you're not even entitled to an age pension at all, so be very careful and aware of that.

The second thing is health cards.

So if you would have qualified for a Commonwealth Senior's health care card.

The deemed income from your new superbalance could actually impact your eligibility for discount of medicine and services.

And you know those pension cards senior health cards are really valuable.

The other thing is capital gains tax.

If your home has always been your main residence, it's likely it's exempt from CGT, so you don't need to worry.

But if there is any stage where your family home was rented out, you may be up for some capital gains tax, so please check with your accountant.

And then so you need to think about the timing of your contribution.

You only get one downsizer contribution your retirement, so make sure you strategically work it out and you're comfortable with that money being in Super even though you are only sort of three years away from retiring, and it's really important, all right.

The next thing is to think about is how to plan to allocate the proceeds, all the proceeds, so if you do decide to go and sell, it's essential that you know how to use those that money properly so that it's working for you and it's working for you efficiently in the way that you want it to.

So a really smart approach to consider would be.

Obviously, as we've said topping up, you're super using this downsize a rule to boost your balance and help set yourself up for retirement, and of course you know making the most of that tax free income on you once you meet the conditions of release and retire.

And I should really remind everyone you know when you have no tax from your allocated pension.

The impact of this from a longevity point of view is really a powerful because you're not having to pay as much tax or any tax, so therefore the funds will last a lot longer.

This is why I say super sexy.

The other thing to really think about is making sure you've got enough cash set aside.

I always say to people who are approaching retirement or retired, please keep two years with a living expenses in a high ter of savings account or maybe even a term deposit, so that if there's ever a situation where your superannuation investment portfolio is experiencing severe market fluctuations which are normal or natural, you're never forced into a position where you have to start selling and crystallizing losses.

You can use the money set aside and live off that to allow time to let them your portfolio recover and obviously you'll make also make the most of you know, reinvesting dividends at a lower share price.

The other thing to think about is your investment portfolio.

I don't know if you have any investments, but if there's going to be a significant amount of money left over after downsizing putting money to super, you know, you may want to look at topping up some investment portfolios or starting an investment portfolio, obviously under the strategic guidance of a financial planner, because you might have your super, you might have some savings, and then you also might want to have say an investment portfolio such as you know, dividend paying shares with you know, frank dividends.

It can be really effective, like through a listed investment company or ETFs.

And this could also be really helpful if you want a little bit of liquidity before age sixty five, depending on obviously how important accessibility is to you.

Then you've got to start building your advice team.

Finally, like Pamela, you're at a point a crossroad in your life where it is now time to bring in professional support.

You need a qualified licensed financial planner because they're going to help you model your retirement cash flow and actually estimate how long this money could potentially last.

They're also going to identify whether your downsized FI will actually meet your needs.

You know, I've spoken about this, it may not be enough and if not, they can help you come up with different ideas to bridge this shortfall.

And you know, these might be things like, you know, considering salary sacrificing or making additional after tax contributions whilst you're still working part time and you know you've got a good cash flow happening.

They'll also a review whether you know you need to look at investing, you know, investing that additional funds in a way that will help support your your income needs for retire and also help protect your capital.

You know, one thing I would really be thinking about is do you want to leave money to your estate or are you happy to eat into all of your superinnuation over a thirty thirty five year period.

These are things that you need to talk about with the financial planner in those projections and ensuring that you're super your savings, your investments, they're always aligned to your goals, but also your risk tolerance.

I don't know where that seventy seven thousand dollars is invested in your SUPER, so you should find out where it is and get some advice around that so that you're money is invested in your risk comfort level.

And when you do this, you know, see a financial partner.

They will coordinate with your accountant.

They can also speak with your real estate agent to ensure that every step of the way, from the selling, the timing of putting money to super to you know, buying the new home, everything happens smoothly and strategically with your best interests at heart.

You know, this is really an opportunity for you to trans transform I guess the value of your home into long term sustainable income and independence and allow you to have that secure but also enjoyable retirement that you deserve.

So Pamela, Yes, downsizing can be an excellent way to unlock all that equity within your home and strengthen your financial position, particularly for retirement.

And you know, using this downsize a contribution rule or opportunity is very, very valuable and this is definitely not an automatic solution.

The real success comes from planning mindfully, intentionally and proactively planning, knowing all your numbers, knowing exactly what you want per annum to live off, how much you want to leave in your estate, all the things that you might need and want during retirement, and getting that professional guidance and putting every dollar of work really for you intentionally.

So thank you so much for such a thoughtful question that I know so many people will value hearing about.

And if you're listening to this yourself thinking okay, I'm in a similar position, can you please take this as your sign to start here, that is, to review a super get really clear on your living expenses and how much you want to be able to retire and retire on each year, whether you want to leave money in your a state or not, and then go and seek professional financial advice from a financial planner.

And if you need a recommendation, just send me a DM on Instagram and I can give you a couple of contacts with people that I know are real good at that job.

Now, if this episode helped you, can you do me a huge favor and just send it right now to any family members or friends who might be thinking about dan sizing too.

And of course, if you want your own question featured on Sugar Mama's Start Here episode, just send me a DIM on Instagram at Canna Campbell Official or sugar Mama TV.

All right, until next time.

This is start here as part of Sugar Mama's fireplay Chow for now, Hong Ko