Q & A Do you need to own a home in Retirement?

QUESTION: We are a semi-retired couple, 60 and 65 respectively, with no dependants, one on Super, the other working part-time.  We sold our house last year to free up some money and are at present renting.  We have our money invested in diversified bank investments trusts.   We are continually being told we should purchase another property or we will “miss the boat”.  However, in spite of a regular withdrawal to top-up our living expenses, our funds have lost only a small amount, which, if projected into the future would still leave us with a nest-egg in our later years.  Is there anything wrong with this scenario?

 

ANSWER: There are a couple of things you need to consider.  Firstly how are you going to feel renting when you are 80 or 85?  One of the downsides to renting the long term is that your security in staying in that property may be limited due to the landlord deciding to sell the property or maybe change the use of the property.  Moving can be very stressful and the older you get the more stressful this can become.  If you decide in the future that you are not happy renting and wish to buy again will you have enough funds to get back into the market and buy another property?

Secondly do you have a really good understanding of how the capital (investments) you have will provide for you in the future.  I often find that people don’t really understand how much income a certain level of capital can provide them over a long period of time.  Lets look at an example:

If you had $500,000 today, based on a 5% net (after tax return) your capital would provide you with an income of $25,000 per year (500,000 ÷ 20). To get this level of income your capital will reduce over time depending on the return you get from your investments.  A couple of things to note are that $25,000 today will buy you more than it will in 10 years time, and a lot more than it will in say 20 or 30 years time.  This is because inflation reduces over time what a dollar today can buy.  For example a loaf of bread today maybe $3 but in 10 years time it might be $3.50, in 30 years time it might be $4.

Note that if you got less than a 5% net return your money would run out quicker (this would be the case if you had your money in term deposits as you would get maybe only 2-3% net return).  If you had your capital invested in a more aggressive strategy you may get more than 5% and you money will last longer, however you need to consider the risks associated with this.

How would your income requirements change once you both are retired and collecting the NZ super? This may change the income you need from your investments.

I would highly recommend in this situation that you sit down with an Authorised Financial Advisor and get them to help you clearly understand the financial implications of this strategy and how the numbers play out over the long term. What sounds like a good idea today may be very different in the future. The main concern I have with this strategy for you is your options may become more limited over time and that your money may not last as long as you think it will.