Downsizing in retirement: Why selling your home is not always the financial win it appears to be

Downsizing in retirement can unlock capital and reduce expenses, but the financial benefit is often smaller than expected. Selling costs, taxes, transfer fees, renovations and lifestyle considerations can quickly erode the apparent gain.

For many South Africans approaching retirement, downsizing seems like an obvious financial decision. The advice is simple: sell the large family home, buy something smaller and invest the difference.

In theory, this can be an excellent strategy. It can release capital, reduce monthly expenses and allow retirees to move into a home that better suits their changing lifestyle.

However, the mistake many retirees make is comparing only the selling price of their current home with the purchase price of the new property. The real calculation is far more complicated.

The question is not: “How much is my house worth?”  The question is: “How much will actually remain after all costs have been paid?”

A family home is often one of the largest assets a South African owns, but it is also an asset that usually does not produce income. Downsizing can unlock some of this wealth and provide additional capital for retirement expenses, healthcare, travel or unexpected costs.

Read: The five-year countdown: Building a realistic retirement budget

It can also reduce ongoing expenses. A smaller property may mean lower rates and taxes, reduced insurance costs, less maintenance and lower gardening and cleaning expenses.

Saving even R4 000 per month on property-related expenses equates to R48 000 per year. Over a 20-year retirement, that represents almost R1 million before considering inflation or investment returns.

Beyond the financial benefits, downsizing can also improve quality of life. A large family home may have been ideal when children were living at home, but later in life it can become a burden. Maintaining gardens, managing repairs and navigating stairs or multiple levels can become increasingly difficult.

Moving to a single-storey property, a secure estate or a home closer to family and healthcare facilities can provide greater convenience and independence.

However, downsizing also has significant drawbacks that are often overlooked.

The first is transaction costs.

Counting the cost of downsizing

Selling a property can involve estate-agent commission, Vat on commission, bond cancellation costs, compliance certificates, repairs and preparation before the sale. Moving expenses, storage and temporary accommodation can add further costs.

Then there are costs associated with purchasing the replacement property, including transfer duty, legal fees, bond costs, renovations and furniture.

These expenses can easily consume hundreds of thousands of rand. Capital gains tax is another consideration. Many homeowners assume that selling their primary residence is completely tax-free, but this is not always the case.

Individuals receive a primary residence exclusion, but long-term property owners who have experienced significant growth in their property value may still have a taxable capital gain after taking the exclusions into account.

Read: Retiring Soon? 10 questions to ask before you draw a single rand

The calculation is also not simply the selling price minus the original purchase price. Certain qualifying costs, improvements and transaction expenses may influence the final calculation, which is why proper advice and record-keeping are important.

Another common mistake is assuming that a smaller property will automatically be much cheaper.

Many retirees want to remain in the same area, maintain security, have access to healthcare and live in a modern property. In some parts of South Africa, a smaller home in a desirable location or retirement estate may cost almost as much as the original family home.

In addition, lower maintenance costs may be replaced by higher levies and estate fees.

The emotional side of downsizing

There is also an emotional side to consider. A home is not simply an asset on a balance sheet. It may represent decades of memories, friendships, community connections and family milestones.

A move that looks attractive financially may have unexpected personal costs if it results in losing a support network or a lifestyle that brings meaning and happiness.

Consider a retiree who sells a Johannesburg home worth R4.2 million.

After estate-agent commission, settling the remaining bond, repairs and moving expenses, the proceeds could already be significantly lower than expected.

After accounting for capital gains tax, purchasing a smaller property and making it suitable for retirement, the amount left to invest may be far less than the original expectation.

Read: Your 50s: The decade that locks in your retirement options

If the remaining capital is R500 000, a 4% withdrawal rate would provide only about R20 000 per year before tax and investment fees.

That does not mean downsizing is a bad decision. The new home may provide better security, lower costs and a more suitable retirement lifestyle.

But the decision must be based on realistic numbers, not assumptions.

Before selling, retirees should ask:

• How much will I receive after all selling costs and taxes?

• What will the new property cost after transfer duty, legal fees and renovations?

• How much capital will actually remain to invest?

• How much income can that capital sustainably provide?

• Will my new home still suit me in 10 or 20 years?

• And perhaps most importantly: am I moving towards a better retirement, or simply following general advice?

Downsizing can create financial freedom, but it is not automatically the right choice for everyone.

The best retirement decisions balance both sides of the equation: the numbers and the life you want to live.

A successful retirement is not just about owning less. It is about creating a lifestyle that provides security, independence and fulfilment for the years ahead.