I’ve paid off my mortgage, should I get a bigger house?

Women with CentsBlog, Mortgage

“Hi Tash, I’m 10 years away from retirement and have almost paid off my primary residence, a townhouse. Should I be upgrading to a bigger house?”

Congratulations on paying off your home! What a great feeling.

Now the first question I would ask you is why you might want to upgrade to a bigger home? Given that you are approaching retirement, I wouldn’t be rushing to be getting into more debt.

If, on the other hand, there is a good reason for buying a bigger home, make sure you are clear on what your plans are for paying off the debt by the time you retire – nobody wants to head into retirement with a mortgage over their head. Keep in mind that at this age the bank will likely want to know your exit strategy (ie how you plan to pay the loan off), and often the plan can’t be to use your super to clear the debt.

Most people tend to look at downsizing as they approach retirement because often the kids have left the nest and they don’t need all the extra room (or all the extra cleaning and maintenance!)  and it can also be an effective way to boost your super.

Generally speaking, the lead up to retirement can be a good opportunity to take advantage of being debt free and start building up your savings for retirement. Why is that important? Well…

We are living longer

In 1965 the average life expectancy for a new-born male was 67.6 and for a new-born female, 74.2. But in 2007 those predictions had gone up significantly to 79.3 for males and 83.9 for females.

But there is a shortfall in our retirement savings

ASFA estimates the lump sum needed to support a comfortable lifestyle for a couple is $640,000 and $545,000 for a single person (assuming you own your home and are eligible to receive a partial Age Pension). But they also showed the average superannuation balances in 2015 of those around retirement age (60 to 64) were $292,500 for men and only $138,150 for women. Quite a gap.

Time to get planning

So now is a good time to imagine what you want your life in retirement to look like and set some goals for the years that lead up to it. How much money will you need to live off? What other plans do you have for your retirement? How is your health? Do you still plan on working part time?
How much super will you need? (ASIC’s retirement planner is a helpful tool for this).

Once you have an idea of how much money you will need in retirement you can start to work backwards to decide how best to invest any spare cash!

Know your options

When looking to boost your retirement savings, there can be several effective strategies available to you, such as salary sacrificing into super, making after tax super contributions or investing outside of super.

Things to consider are:

  • How much do you need to contribute to super each year to achieve your retirement goals?
  • How much do you currently earn and pay in tax?
  • Are you eligible for the Government co-contribution?
  • How much can you salary sacrifice into super before exceeding the concessional contribution cap (currently $25,000 pa including your employer’s SGC contributions)
  • How much can you contribute into super after tax before exceeding non concessional contribution caps (currently $100,000 pa)
  • Do you want to be able to access the funds before you reach preservation age?
  • Is there a large age gap between you and your spouse (super contribution splitting may be an option in this case)
  • Are you eligible for any special concessions (for example from 1 July 2018 those over 65 can use the proceeds of the sale of their home to boost their super tax free).

As you can see there’s lots to think about and the rules can change from year to year so it is important to do your research upfront. The ASIC Moneysmart and ATO websites can be useful resources, as can a good financial planner.

If you would like to learn more about managing your super and being smarter with your money, be sure to check out our Money Bootcamp. I hope that has helped give you some clarity around what to consider when making your decision. Good luck!

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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.

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