While the lure of increased spending money can encourage people towards downsizing, downsizing is not without its risks. These risks include the following:

High Transfer Costs. Depending on which state you live in, the costs of selling one home and buying another are substantial. For example, selling a property in Victoria for $600,000 will cost between $12,000 and $18,000 in agent's fees (source: Choice magazine). Purchasing a new property for $400,000 will lead to $19,000 in stamp duty (source: State Revenue Office). Add in another $3,000 or so in costs (legal, removalists, etc) and the changeover cost will be somewhere between $34,000 and $40,000). so, selling one home for $600,000 and buying another for $400,000 does not give rise to actually receiving an extra $200,000 in cash. The cash benefit is no more than $166,000.

The 'cheaper' house may not be cheaper. When downsizing, most people are moving from a house they know well to one that they do not know at all. This can lead people to experience unexpected costs that seriously eat into any money that has been 'freed up' by the move. These costs can include unknown faults that need to be rectified, or just simple modifications to bring the home up to a standard that the new residents enjoy.

The home is an exempt asset for Centrelink purposes. Cash is not. So, unless the amount of freed-up cash is less than the threshold, there will be a change to the asset-tested Centrelink pension amount. Swapping house for cash can reduce pensions.

Reduced Future Capital Growth. The twenty-year average return on residential Australian property to 31 December 2017 was 10.2%. The example change, above, from a $600,000 home to a $400,000 home, would have therefore 'cost' almost $20,000 a year in lost capital growth (9.8% of $200,000).

As capital growth is a percentage, it follows that reducing the value of the residential property being held will reduce any future capital growth that will be available. The average age of retirement for a man is 63 years and for a woman is 59 years. The life expectancy for anyone who reaches the age of 65 is 84 for men and 86 for women. This means that there is a good chance that a women retiring at 59 faces another 27 years (on average) in which to finance her retirement. Imagine the negative effect of downsizing on capital growth extrapolated out over 27 years.

Because retirements can be long, the early years of retirement, in particular, are years in which it is most beneficial that a person try to continue to accumulate as much wealth as possible. Downsizing early in retirement can make the later stages of retirement difficult.

If the new home is cheaper, there may be a reason. Amongst other things, the price of homes tends to be a function of demand. So, if the new home is cheaper, this is because fewer people want to buy it. The client needs to ask why this is the case. Is the new home further from amenities, such as shops and, importantly, health care? (Retirement does have an inevitable conclusion, after all).

It is not unusual to observe people moving to a cheaper area earlier in retirement, only to find themselves unable to afford to move back to their original area years later when health or family needs make the new home no longer appropriate. This can be a particular problem for sea or tree changers.

Of course, the new home might also simply be cheaper because it is not as good as the old one.

Moving out of the current area can have unexpected consequences. Many people find that moving to a new area is not as easy as they expected it would be. One relatively common tale is where a couple move in retirement, only for one of them to die sooner than expected. This then leaves the surviving member of the couple living some distance from friends and family and finding it difficult to make new friends in the new location. Widows, in particular, often tell the tale of no longer being invited to socialise after their husband has passed away.