PROPERTY

Owning a home is the most important strategy for retirement

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Make no mistake: owning a fully paid-off home is the most important strategy for retirees and anyone heading into retirement.

It is the only asset not included in the test for a part or full age pension and the only investment that is free of capital gains tax when you sell. So the family home is shaping up as a passport to a more comfortable retirement now that retirees face age pension cuts from January 2017, announced in the 2015 federal budget.

And those planning to retire in the next few years should carefully consider the role their family home will play in paying for the lifestyle they want.

home property ownership in retirement

If your likely super balance will be more than the $375,000 asset test-free threshold for couples ($250,000 singles) but less than $823,000 ($547,000 singles), where you lose access to even a part pension, consider whether you may be better off spending surplus income to upgrade your home before retirement, especially if adding that money to your savings could push you over the threshold.

There are several strategies - including downsizing, upsizing, improving and taking out a reverse mortgage - that will help maximise the contribution your home can make to your retirement lifestyle. Which option you choose depends on your circumstances.

For those already retired, the proposed changes to the asset test for the age pension will affect 326,000 people, who will either lose their age pension or have it reduced.

This will have a big impact on so-called wealthy retirees, especially now that historic low interest rates make it hard to earn reasonable returns.

Under the new regime, a home-owning couple would have a higher annual income with just $200,000 in savings than a couple with $1.1 million, assuming a 3% rate of return, according to an analysis from the Association of Superannuation Funds of Australia (ASFA).

The couple with $1.1 million would receive an annual income of $33,000 while the couple with $200,000 would have access to the full government age pension and earn $40,900 a year. Both are less than the $58,000 which ASFA says a couple needs for a comfortable retirement.

If you are sitting on assets worth just less than $1.15 million, the current level at which the pension cuts out, you could consider upgrading your home, selling and buying a more expensive one to bring you under the new $823,000 threshold to receive a part pension. You have about 18 months to organise this.

Retiring with a valuable home gives you lots of options, including the ability to release capital at a later stage by either downsizing, selling and buying a cheaper home, or taking out a reverse mortgage.

When upsizing you could consider a home that has some letting potential, such as a granny flat or a part that could be sectioned off to produce extra income. Of course, this could also affect your pension, so you will need to take that into consideration.

If you want to keep most of your capital, and therefore not qualify for a part-pension, you could spend some money renovating your property to produce income.

For example, a granny flat in your backyard or a "fonzie" flat over your garage can produce rental yields of up to 15%, from a combination of rent and depreciation allowances. They are relatively cheap to build - about $120,000 for a good, standard one-bedroom unit, industry sources say.

If this seems too hard, or your property does not meet your state government's regulations for adding accommodation, you could rent out a spare room. Most retirees are empty nesters, so are likely to have more than their fair share of the nation's 9 million spare bedrooms.

Adding an ensuite to a spare room will increase its attractiveness, or even better you could extend to include a simple cooking-sitting area.

If your home is in a popular tourist area, you could consider renting your spare space to visitors through websites such as Airbnb.com.au or Stayz.com.au. Returns for short-term rentals are generally superior to longer term but you do have to cope with vacancies and the domestic chores associated with casual lettings.

A study by BIS Shrapnel found that in the year to July 2013, 85% of Airbnb hosts in Sydney rented out the home they lived in and a host earned $4505pa on average by renting 37 nights a year.

For those who need more money to fund their lifestyle but don't want to move out of their home or share it with strangers, a reverse mortgage or equity release scheme could be the answer.

But make sure you understand the impact compounding interest rates, currently around 6% to 7%, will have on the debt over the loan's term. A $100,000 home equity loan on a $600,000 home at 7%pa will accumulate additional debt of about $260,000 over 20 years.

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Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.
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