Alan Clarke: Don't lose your fallback position

Retirement villages do have appeal, but consider your future financial security before making a purchase.

If you want to "get out and about" as you get older, you will get through some money.

If you have already stopped work, where will you get that money? Government super pays the food and power bill, but is nowhere near enough to pay for "out and about" activities.

Do you have lots of savings? Can you sell something? Or do you need to sell your big home and downsize?

First consideration -- keep your fallback position as long as possible

Read this first.

I am not a fan of anyone going into a retirement village until they are well into retirement. Why?

Because you lose your "trade-your-house-down-and-release-more-cash" fallback position. In my experience, very few Kiwis can afford to lose it.

As you all know, or should, there is that nasty 25 per cent to 33 per cent exit fee penalty at most retirement villages.

If you want out, about 25 per cent to 33 per cent is taken off -- but even worse, it is not taken off the value today, but what you paid for it.

So they effectively kill any fallback position most of us might have.

These villages are a one-way street -- don't enter until you are really sure you will never need to exit.

Use the "Ron principle" -- knock knock -- who's there? Ron. Ron who? Later on.

A real life example

A nice lady came to ask me about this. She was 70, her husband was 80. Their $700,000 house was too big -- he could not get up the stairs and their garden was out of control.

She asked me if they should go into a village, so I asked her lots of questions.

The key bit of information came to light -- they had $250,000 about 10 years ago, but it had been slowly whittled away just living, helping children, doing all the things that people their age do, and are now down to $50,000. (I see this a lot in my job). This was worrying her too.

If they went into a village at $450,000, upgraded the car, and the inevitable new curtains, big TV, new couch or new bed, they would release about $150,000 to $180,000.

So $160,000 added to their current $50,000 would be over $200,000. But after another seven to 10 years that would most likely be whittled down again. They could easily run out of money when she is 80 and he 90.

Especially if her husband -- age 80 today -- died before her -- her income would drop from joint super to single living alone super -- a $9000 pa income drop.

So if they go into village now, and she runs low on money again in say 10 years, she would have no fallback position. If she then sold out of the village, she would get only 65 per cent to 70 per cent of her purchase price back, and after inflation, rising house prices, etc, at age 80 she would be poor and homeless.

Like I said before, these villages are a one-way street.

So I recommended they buy a unit worth about $400,000 to $500,000 outside a village and carry on -- then they have retained their fallback position

Much later on, when and if she is on her own, she can sell -- for say $600,000 -- and proceed to go into a small unit -- at say $400,000 -- and release another $200,000 which will, hopefully, get her through to age 90-plus.

They took my advice and so far so good. They sold at $660,000 nett, their new unit cost $525,000 and is very nice, and it has already risen $30,000 in value.

Best of all, it's all theirs when and if they sell.

Villages can be good

I am not against villages at all. Many people love them, they feel safe and secure, there are lots of activities, and when you're there you don't get lonely.

It is just that reserve and fallback money gives you options, and the more options you have, the better your life can be -- and less stressful too.

So just remember Ron.

Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available at www.acfs.co.nz

Alan is an independent authorised financial adviser (AFA) FSP26532; his disclosure statement is available on request and is free.