Downsizing for FIRE is not a new idea. I have seen many older families\couples do it but it never seems planned. Yet, its a strategy that has the potential to be rewarding for some people who want to achieve FIRE. Especially those who live in high-cost locations. The key difference is to make the strategy intentional, don't downsize now but in the future. The benefits of this strategy include:
- Reduced income tax (perhaps zero)
- Comfortable living arrangements for say, a family
- Leverage existing transfer\stamp duties
- Reduce property costs transfers
So for example here is a family that spends 50k PA with the following balance sheet:
|Portfolio or Asset||$|
|Retirement Accounts (Super)||500,000|
This lucky family has a NetWorth of $2M but only half of it is earning them any income. At their expense rate they are not "FIRE" so they will need to draw down on capital and downsize to reach an age when they can use their retirement accounts.
Here is the Downsize FI drawdown strategy from the age of 40 - see assumptions but its all modelled in today's money (inflation-adjusted returns):
|1||40||54||Investment Account - 500k to 0k|
House: 1000k to 1000k
Retirement: 500k to 990k
|2||54||68||Investment Account - 0k to 500k to 0k|
House: 1000k to 500k
Retirement: 990k to 1,960k
|3||68||TBC||Investment Account - 500k to 0k|
House: 500k to 500k
Retirement: 990k to 1,960k
This scenario runs counter to much of the FIRE advice such as, "you should not include your home" or, "All your investments should be liquid" or "Expensive houses are a big no-no". Valid points but early retirement is always a more risky strategy than working until you die. And this strategy does add a few more risks and certainly isn't for everyone.
A few key risks that might keep me up at night are are that my property could lose value while ones I might want to downsize to rise. Also, my property could perform poorly compared to stock/bonds. Knowing that I won't be able to live here "forever" might also get to me. Yet, what keeps me up at night is knowing that fear is what is keeping me working when I already have enough.
DownsizeFI gives us another option to consider rather than a geoarbitrage or renting strategy. I can't see myself relying on this strategy yet. But it's tempting. Anyway, I hope this post helps you think about conventional retirement strategy as an option for early retirement.
- 7% return minus 2% inflation (Net 5% return on all investments) - via https://www.noelwhittaker.com.au/resources/calculators/retirement-drawdown-calculator/
- The house didn't return anything
- No transfer additional expenses were included in the year of transfer
- You could sell and rent but then you will need to pay income tax - so see tax-advantaged
- Nothing wrong with being a renter - you just give all a massive tax break - imputed RENT
- If they downsized now - yes they could FIRE however they would have to impact their lifestyle now and potentially need to make 2 or more real estate transactions