THE STRESS
It will be quite stressful watching your money whittle away, even though you know you have a big house that you can downsize.
No one likes to see their bank account drift down and perhaps the time comes when you are very low on cash and have no choice but to sell.
Being forced to sell is stressful.
DIVERSIFICATION
Property crazy Kiwis tend to believe that property rises 5 per cent to 10 per cent annually and it can never fall in value.
But what if something happens and it does fall? Or it gets damaged by a quake and takes years to get insurance settled and repairs done?
If the bulk of your money is in that single asset, that could hurt!
Diversification is a good friend and always will be.
DOWNSIZING - WHEN?
Keeping your big house and downsizing later is not an ideal or efficient strategy.
Selling gradually means:
-Your money is not as fully invested as it could be.
-Or it is not invested long enough.
-Or you have to sell something when it is down.
-Undisturbed investments work better.
How does this compare to having downsized at age 65, released, for example, $150,000, and invested a total of $300,000?
THE CALCULATIONS
Downsizing at age 65 means $300,000 invested at say 6 per cent net in a balanced portfolio, drawing down $1500 a month or $18,000 a year will last a tad over 23 years (assuming inflation of 3 per cent and an annual increase in drawings of 3 per cent).
Over the 23-year period it will have returned interest and capital gains of $302,000.
A sum of $150,000 invested at say 5 per cent net (a shorter term gives lower returns) in a balanced portfolio, drawing down $1500 a month or $18,000 a year will run out after 9 years.
Over that period it will have returned a gain of $39,170.
The second $150,000 released from your house downsize will have to pay you a quite a bit more from year nine - at 3 per cent inflation it will need to be $1900 a month.
Hence the second $150,000 will only last seven years and only gain $29,500. All gone after 16 years and it only earns $39,200 + $29,500 = about $69,000.
Money lasting 23 years versus 16 years also means less stress.
INFLATION
The enemy of retired people with fixed assets is inflation and this is a graphic example of just how much.
AND THE CAPITAL GAIN FROM KEEPING THE BIG HOUSE?
Good point, and it may well compensate a lot.
Or will it not compensate at all?
The MREINZ recently compared housing data over the past five years, and found that the annual growth rate (when adjusted for inflation) for house prices was:
-6.2 per cent in Auckland.
-5.8 per cent in Canterbury.
-Yes, a decline in many parts of New Zealand.
So you can't rely on your house going up in value.
Either way, your big house did not - could not - pay you any income or cashflow during the seven to 10 years that you kept it longer.
ZOMBIE TOWNS
Economists are now referring to "zombie towns" in New Zealand - those towns that are showing little or no growth - and sadly there are a lot of them.
Put another way, 80 per cent of job growth in New Zealand over the past five years came from Auckland.
If your house is in a zombie town, capital gain may well be muted or absent altogether.
However, zombie towns can be good places - very good places - to live.
SO WHICH WAY?
The figures/theory favour a downsize early in retirement.
But theory is only theory - variables such as the economy, disasters, the homeowners involved and how long each of them live, can all be quite different.
The best way is to get independent advice annually and keep tracking your situation.
That way you will be well informed, progressively thinking about it, and your subconscious will be processing it at 2am daily.
Consequently, you are far more likely to get it right when you do it.
-Proactive planners are the bookies' choice to win.
-Reactive knee jerkers: bookies' choice to lose.
