Lots of people do. Selling the house to buy a less expensive one has been a good and easy option for a lot of people in the past.
The basic scenario looks something like this. A couple has a house in Auckland worth $1.5m with a mortgage of $300,000. The plan is, they will sell the house on retirement, pay off the mortgage and so have $1.2m. They will buy a house outside Auckland (let's say in Fielding) for $500,000 and so have $700,000 to invest for income.
If we apply the financial planning rule of thumb and assume that they can draw 4 per cent per annum from their investment capital, they will have $28,000 p.a. to go with their NZ Super of about $30,000 p.a.
A lot of people would think that $58,000 p.a. would make a very comfortable retirement. It is certainly well above the average retirement income in New Zealand.
However, here are some issues for people who are completely reliant on downsizing to think about. First of these is that the couple owns a house and not much else. This makes the couple very concentrated to just one residential property asset class. if that market took a big hit they could be in trouble.
Some people would say that such a hit is possible because as the baby boom generation ages, there could be a rush to the home-owning exits.
An Auckland property market slump without a corresponding slump in Fielding would have the couple in trouble. If the couple only got $1.2m for their house in Auckland, they would have to buy a house in Fielding at $200,000 to have the same investment capital.
Second, if the couple plans to do any sort of work they could find that work is not available in Fielding. No doubt there will be some work in Fielding but perhaps not the type and with the same pay rate as could be found in Auckland. A lower pay rate may not be completely offset by lower living costs.
Third, they could leave family and friends behind. Many older people tell me that shifting and entering a new community becomes more difficult as you get older. Moreover, there could be greater costs for visits to the children and grandchildren.
Finally, living costs generally may not be as low as expected. The major one for some are health costs. A town like Fielding is quite possibly well served by GPs but diagnostics, specialists, and surgeons will be fairly thin on the ground. Healthcare demand and costs increase as you get older but if you add travel and accommodation as well they may get out of hand.
Planning to downsize is not a bad idea in itself. However, when you consider the risks, I would usually prefer that downsizing the house was a backup for something going awry rather than the main plan itself.