Downsizing Is No Way To Fund Your Retirement

housesIf you’re not saving enough to fund a decent retirement, what do you do? If you’re a homeowner, there seems to be an easy answer.

You sell your home, move to a cheaper one, and live off the profit.

This is called downsizing, and astonishingly, more than two million homeowners over the age of 55 are relying on this to fund their final years, according to new research from Prudential.

On average, they expect to raise £85,300.

Nearly one in 10 hopeful souls hope to raise £200,000 or more.

They’ll be lucky.

Two Million Homeowners Can Be Wrong

The phrase “my property is my pension” was big before the financial crisis. And as the housing market hits bubble territory again, it is creeping back into fashion.

It is a dangerous phrase, because it has given millions an excuse for actively failing to save for their retirement, under the lazy assumption that rising house prices will do the trick.

You just sit tight, pay down your mortgage, then suddenly one day you’ve got hundreds of thousands of pounds at your disposal.

It spares you the hard slog of investing in a pension or tax-efficient ISA, and other forward-sighted stuff like that.

But your property isn’t your pension. It’s your home.

Incredible Shrinking Profits

Downsizing isn’t completely daft. Plenty of homeowners do it as they get older, because they no longer want the effort and expense of running a large family home.

Moving somewhere smaller can also slash your household costs such as utility bills and council tax, saving you hundreds of pounds every month.

I’m absolutely fine with that. 

But you don’t want to do it purely because you have no other way of funding your retirement.

The downside to downsizing

Downsizing can be quite a wrench, because it involves leaving a home in which you have years of happy memories.

Selling and buying a home is also expensive, because estate agency fees, conveyancing costs, removals and stamp duty on your new property can easily top £10,000.

You may also end of spending more on your new property than you expect, especially if you fall in love with somewhere.

And unless you buy a new-build, you will also have the cost of doing up your new place, to match your tastes. 

All of which will eat away at the profits you hope to make, and ultimately, your pension.

The sums don’t really work unless you own a large home in a property hotspot in London and the South East, and are looking to move to a cheaper area, preferably up north.

Don’t think you can snap up a cheap bungalow, by the way. They are in big demand, from other deluded downsizers.

Downsize That!

You certainly won’t want to move downmarket at retirement, but that’s where the cheaper properties are. They also tend to have poorer transport links, shops and other facilities.

And you probably won’t want to move away from your family, or your network of friends and neighbours.

Downsizing is fine as a fallback, but please don’t mistake it for retirement planning.

You are also gambling your retirement on the notion that house prices will keep rising and rising. With property looking more like a bubble every day, that’s a dangerous assumption to make.

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Harvey owns shares in Prudential. He doesn't own any other company mentioned in this article.