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I was on the radio the other day talking to the announcer before going on air.
He said: "I'm nearly 65 and thinking about my eventual retirement, so it seems to make sense to downsize my house. We told our adult children we might and they got upset. They said 'oh no, please don't, we always want to be able to come back to the family home'."
How many people near retirement or already retired have a big third and/or fourth unused bedroom?
"Cashflow is king" from age 16 to 96
So often I see people in their 60s and 70s in big homes, but without enough income.
Typically, a $700,000 home and $100,000 invested. They get $28,000 a year joint national super and, say, 5 per cent a year ($5,000) from their $100,000.
A total income of $33,000 a year.
Yet we are told we need about $40,000 to $50,000 a year after tax to have a comfortable retirement.
So what about this?
A $500,000 home and $300,000 invested. National super of $28,000 plus 5 per cent ($15,000) from investments.
A total of $43,000 a year. Looks a bit better, doesn't it?
Empty bedrooms are dead money
This could be $100,000 tied up in a non-productive asset. If it is two bedrooms, $200,000 is non-productive.
Yes, but we're getting capital gain
The value of the house may rise, so there may be capital gain, but it is inaccessible until the house is sold.
If there is too little invested, the income just won't be enough and so they will either:
• Not really live, or
• The investment capital gets spent and erodes rather quickly.
It is always a shame to see people spending less than they could, and doing less than they could in retirement, by trying to hang on to that big house.
What's the point in hanging on? We don't live forever.
Over 50 and buying a bigger house
You are 50-plus and have a nice debt-free home worth around $550,000, but wonder if you can have an even nicer house.
You decide to upgrade and borrow $200,000 to buy a very nice home costing $750,000. The new mortgage at 7 per cent over 15 years costs $1800 a month.
You will have to earn about $160,000 in gross earnings to pay $123,500 in mortgage interest.
You were debt free, but not now. You have to get up early every morning to get to work to keep paying that mortgage because you have debt to pay.
In some ways it is a shame because you are in the last third of your working life and are still tied to your job and employer.
If you did not upgrade you could relax somewhat, as you would not be under any great pressure to work, and would owe nothing. You may even be able to take a sabbatical.
The $1800 a month that was going to your mortgage can now go into savings.
If it earns 6 per cent a year over 15 years, it will grow to $533,000.
Or maybe $475,000 if you miss a year of savings, and have a big trip.
Of course, the $750,000 house will grow in value over 15 years too, so at age 65 you may end up with similar total assets.
But which option will afford you the better quality of life?
Living debt free for 10 to 15 years, and arriving at age 65 with about $500,000 in liquid investments?
Or was it the bigger home? A much nicer place to live, but you had to work under more pressure, and arrived at age 65 with not that much in savings.
It will have cost you $123,500 in interest alone, so it will need to appreciate by about $250,000 over the next 15 years, or you will have slogged it out for very little.
Probably before too long, you will have to downgrade the big house to release cash for retirement income.
Worth thinking about, isn't it?
Alan Clarke is a financial and retirement adviser, and author. His second book, The Great NZ Work, Money & Retirement Puzzle is available at acfs.co.nz. Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and free of charge.