Don't Put All Your Eggs In One House

Funding Your Retirement Solely by Downsizing the Family Home: a Dangerous Game

  "   HatTip   " is written by Nick Lincoln, IFA

"HatTip" is written by Nick Lincoln, IFA

"According to a recent survey from Barings, around three million people are planning to fund their retirement solely from the proceeds of 'downsizing' their family home."

The above is from an article by former Pensions Minister Steve Webb. Mr Webb was unique for a Pensions Minister in that:

  1. He generally knew his brief.
  2. He held the post for five years. Before his tenure "The Blair Brown Project" truly was a horror story: between 2001 to 2010 alone, there were eight (!) Secretaries of State for Work and Pensions.

Mr Webb's article was on the subject of downsizing the family home. Downsizing involves selling your current house to purchase a smaller, less expensive one, and in so doing realising a chunk of capital. Downsizing is a common theme in discussions with our retired clients. However, it is only one of a number of retirement strategies that we discuss: it is never the strategy!

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Why Not?

Basing your entire retirement funding needs around a single strategy is risky. Very risky. This is especially so when the average capital ("equity") released by downsizing in the UK is less than £114,000, according to Mr Webb. We are living longer and longer: how long will £114,000 last for someone who retires at, say, 62 and who may well live into their mid-80s? Not very, is the answer.

Admittedly, averages are dangerous, and the amount of equity released in the South-East is considerably more than £114,000. But then so are the associated lifestyle costs of living in this region: servants, for example, do not come cheap.

It Is Not Just the Money, Either

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It is one thing to find a buyer for your home, at just that time in your life when you need capital, and to also find an ideal replacement home, at just that price that makes downsizing worthwhile.

After all, we live in an ageing society: if downsizing is becoming so prevalent, it is not a flight-of-fancy to imagine that the demand for suitable properties to downsize to is high, pushing up the prices of said properties and eating into the "downsize dividend".

As Mr Webb asserts, there are also intangibles at work in the downsizing strategy, including:

  • Not having that empty nest you thought you would. We all know the difficulty of getting onto the housing ladder: more and more children are living for longer and longer with their parents. Throw in relationship breakdowns, a difficult job market etc and one can see that the loved lodgers could be around for a long, long time. You may want to downsize - will they?!
  • Memories: family homes are chock full of them, hopefully, most of them good. When push comes to shove, many people simply find it hard to leave those memories behind. Last week, in their Annual Planning Meeting, I spoke with clients who have been considering downsizing for a number of years. Although their sons have flown the nest, they are now reconsidering: the family home is precious to them in far more than just monetary ways.

Downsizing Can Be Part Of a Retirement Strategy - But Not THE Strategy!

We have many clients who have downsizing as an element of their long-term financial planning. But it is always in conjunction with other strategies that have been in place for years, if not decades: funding tax-privileged investment plans; investing in Buy-to-Let properties; growing and then marketing their business for sale; making (very cautious) assumptions about future inheritances etc.

All of these are sensible, diverse ways of planning for that day when you choose (and it is a choice) to be financially independent, for that moment when you no longer have to work. Having a financial plan in place that embraces a range of retirement funding strategies gives you flexibility. It gives you options. Most importantly, it means that all your eggs are not in one, er, house.

IT IS CRAZY TO BUILD A RETIREMENT PLAN AROUND ONE SINGLE STRATEGY. YOU'RE NOT CRAZY, ARE YOU?

{The above is not specific financial advice aligned to your unique circumstances and requirements. If you act on this article without first reading your own body weight in Key Features Documents, personal illustrations and fund fact-sheets then you may well be struck down by lightning.}
© 2016 Nick Lincoln