Should You Buy Your Retirement Property Before You Retire?

The most common reason people seek our advice is for retirement planning advice.

One of the discussions we often have is the selling of the family home and downsizing or relocating.

The relocating one is interesting. Most clients I speak to want to purchase the planned retirement home 10 years or more before retirement.

The question we are often asked then  - Is this a good idea? The rationale being you can buy now, rent it out, and move in when ready. This way it is both an investment property and somewhere to retire to.

When answering this what comes to mind are hovercrafts? Why hovercraft? Because they are designed for multiple purposes but they don’t really excel at any purpose. Buying the property you are planning on retiring in is similar. It is not necessarily the best investment property, and it may not (when you are ready to retire) be the best retirement property.

The first thing I should note is that of the people that buy their dream retirement property, from my experience 6 out of ten sell without ever stepping foot in the property and even those that move in, don’t always stay.

There are three reasons why you might reconsider.

Firstly the area might seem appealing now, it may be somewhere you have holidayed in, or maybe you have elderly parents in the area. We always recommend if you are planning to make a major move to an area where you have not spent a lot of time, you should rent for six months.

You can rent out your current residence to offset the costs. This makes sure you like the area. For instance Batemans Bay might sound like a great place to live when you are holidaying and in your late fifties. When you retire in your late 60’s and you realise that the closest major hospital is Canberra it may not be so appealing. If you buy somewhere early to take care of family, by the time your retire they may not be in the area.

The area you buy in might change. It might go from rural market gardens to 550sqm blocks and traffic. They might build an airport, freeway, new housing which causes flooding or all manner of issues may arise. This tends to happen more when you buy with the heart than the head. When you are buying an investment property purely for investment you are more likely to do your research.

The second reason is the property itself. Your needs and preferences change. The property that is great today may not suit in the future. You might desire less maintenance or more space.  You might find a single level home is now what you desire, or the side access is not needed because you never did buy that boat or caravan. Whilst three bathrooms sounds great when the house is full, it becomes a lot of cleaning as you age.

Thirdly, which is something we see often your kids or extended family might move somewhere else and you have  a desire to be close to them.

So what do we advise? If you have money and want to buy a property we suggest you buy the best investment property you can. If you research the market and find the best investment you can, the growth on this will likely outstrip the growth on your retirement home purchase.

Thus, if you still want to move to an area you can sell your investment property and use the funds to buy your retirement home. Of course there will be capital gains tax consequences. Let's put this into numbers to examine the different outcomes.

Purchase One – Retirement Dream House

Purchase Price $1,000,000

Stamp Duty $40,233

Costs Of Purchase $5,000

Rent is 4% per annum, or $40,000 per year.

Lets assume this property grows at 3% per annum.

In ten years this property is worth $1,343,916 at the end of ten years.

Purchase 2 – Ideal Investment Property

Purchase Price $1,000,000

Stamp Duty $40,233

Costs Of Purchase $5,000

Rent is 4% per annum, or $40,000 per year( noting you would hope for a better income on an investment property).

Lets assume this property grows at 5%.

In ten years this property is worth $1,628,894.

Now in this case we need to sell the investment property to buy the ideal retirement home above. Note it will cost $1,343,916 to buy.

We sell the home for $1,628,894. Less agents fees and conveyancing we nett $1.6m.

Now we have to consider capital gains tax. The best plan would be to sell in retirement ie when you have no other income. We estimate the total tax payable on the gain would be $84,922.

So we now have $1,515,078.

The stamp duty would be $57,473. So we would have $1,457,605. This would mean we would now own the ideal retirement property and have an additional $113k as savings. If you were to consider adding some of these funds to super as a concessional contribution (age and limits allowing) the tax would be even less and you would boost your retirement savings more.

Of course this scenario compares where you keep the ideal retirement home. As you can see if you decide not to keep it you would be even further behind financially. Further, there can be larger discrepancies in growth rates depending upon where you plan to retire to.

In summary the best way to prepare for retirement is to invest in the best investments available and use those funds to buy your dream retirement home. If you buy that dream home early and change your mind, then you are likely to have neither a good investment nor dream home.