Planning the ownership of your last home before retirement
Home ownership has been a much-debated topic recently through numerous media outlets.
Although the broader debate is about how hard it is for Gen Ys and Millennials to be able to buy their first home, through this article I’d like to highlight the importance of owning your own home outright before entering into retirement. I was recently interviewed by The New Daily to provide some tips for pre-retirees and retirees to consider for the ownership of their last home.
The article highlights how new research from the Australian Centre for Financial Studies reported that about 15% of retirees aged 65–74 were renting and 12% still paying down a mortgage.
In 2016, it is expected that 5,000 Australian Baby Boomers are retiring every week — i.e. 260,000 a year. This is a staggering number of Australians entering into retirement and statistics show 27% of current retirees experience difficulty with home ownership.
As a Financial Planner specialising in retirement planning and property, I feel it is critical to draw the distinction between buying a property vs affording one. Considering that most of us buy a house with borrowed monies from a lender, the key decision to buy the property comes at the back of our income, borrowing capacity and circumstances presented to us at the time of purchase.
Affording a house with associated debt comes with a lot more variables and moving parts that require planning and preparation to stay on top of. We’ve all heard the saying ‘Change is the only constant in life’ and for most people, change can come in various forms such as divorce, change of jobs, redundancy, illness, children etc.
With most mortgages these days spanning up to 30 years, a lot can happen in this time, both good and bad. One change that presents itself with a high probability of occurrence over this time is changes to interest rates, which are currently sitting at an all-time low. A mortgage might look affordable at 4% p.a. on a $500,000 loan, the repayments being say $2,400 a month. However, a person in their 50s needs to consider that if the interest rates increase to say 6% p.a. over the next 5 years, then the same loan will now cost $3,000 a month in repayments. By this time this person is 55 years of age and will need to find an extra $600 per month to keep their home.
Over the course of my career I’ve noticed that a pre-retiree in their 50s would have made an average of 3 property decisions around their home. This being a purchase of their very first home when they were in their 20s, an upgrade to accommodate for their growing family in their 30s, and a downsize when they’ve become an empty nester in their early 50s. As this decision is made and the subsequent purchase is facilitated with a mortgage, often the 30 year count down starts again.
It is therefore critical to ensure that ownership of this last home — i.e. the home that matters — needs to be planned ahead by at least 10 years prior to retirement date, to ensure the idea of a debt free retirement is not just wishful thinking. Strategies and approaches considered in this phase of life cannot be looked at by tackling commitments one at a time, but needs be looked at holistically.
This is because for a pre-retiree in their 50s, options generally start narrowing down. For instance, risk taking appetite diminishes, change in career to a higher paying role becomes less likely and, most importantly, with 10–15 years to go until retirement, it becomes a race against time to have everything set up before for the big day.
Hence it is pivotal to make every dollar count in this phase and all strategies considered need to be carefully devised to address a broad range of avenues like debt reduction, tax minimisation, boosting retirement savings, age pension planning etc., as they are all correlated with each other in some way or another.
The interview mentioned in this article can be found on The New Daily website:
"GOOD FORTUNE NEEDS GREAT PLANNING"
WANT TO LEARN MORE ABOUT RETIREMENT STRATEGIES?
Prashant Nagarajan is providing his expertise at our Learn From the Experts — Guide to Retirement Income Startegies seminar in Melbourne on Wednesday 21st September 2016. Come along for more tips, advice and information about how to prepare for your retirement. Click here for more info and to rsvp.
The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions. Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.