According to the Retirement Commission, almost one in three people today don’t think they’ll have enough by age 65.
Inflation has likely messed up the numbers, so ask yourself this: Will you have ‘enough’, ‘just enough’, or ‘not enough’?
Your retirement outcome depends on two things: When you start preparing, and the decisions you make along the way.
Consider the following three life stages: Starting out, building up, and winding down.
Starting out
Ask any yachtsman – how you start out often determines your ability to win. When my wife and I bought our first home, we had no clue.
We didn’t consider the costs of playing it ‘safe’. Over the fence from the home we bought was another home for sale at twice the price. We could have bought the big one, but we bought the small one instead.
Twenty years on, that’s a $1 million mistake. We failed to buy ‘tomorrow’s home at today’s price’. We chose the house for the newlyweds, not the family.
We ended up borrowing far more in the end, buying a property we could have acquired cheaper, earlier on.
When you’re starting out, conservative choices can haunt you later on. In property, the smaller the steps, the shorter the ladder. And the bigger the mortgage, the harder it is to start filling that retirement gap.
Building up
Another key life stage is when you’re building up that nest egg.
Over a 30-year mortgage term, you’re pretty much paying back $2 for every $1 you borrow. Paying it off faster is a great way to stop your money lining the pockets of the banks.
It’s also a risk-free investment. Paying down the mortgage fast when you’re building up is problematic, though. Low-risk strategies like this are only really good for those with a low-risk tolerance or short timeframe.
If you have more than 10 years of work, why not scoop up more investments, instead.
Paying off your mortgage is easier when the kids leave home, too. The other problem with aggressive mortgage repayments is that you’re locking money away in your home.
If you’re not building wealth outside of your home, what are you going to spend when the income stops?
Sure, you could downgrade homes and release some cash but that’s $25,000-$50,000 in commission – and do you really want to move at 65?
Holding a mortgage over 30 years costs a load more in interest, but it allows you to build wealth over two buckets - not just the one you’re living in!
Winding down
When you’re winding down and in retirement already, it’s trickier.
Hey, if you’re mortgage-free, well done! Unless you have investments, though, how do you fund the gap? Here are three ideas: The reverse mortgage, the ‘poor man’s’ reverse mortgage, and equity-sharing.
Reverse mortgages are hated in some quarters due to the creeping cost of compounding interest payments adding up in the background like a ticking timebomb.
For retirees mentally prepared to unwind their debt-free bliss, a reverse mortgage can be a valid solution. There is no real estate commission and no moving home. The best part is that you can still get some capital gains, should they occur.
Then there’s what I call the ‘Poor Man’s’ reverse mortgage. This needs a bit of planning ahead, but if you pay down your mortgage using a ‘revolving line of credit’ facility you can keep access to a cheaper rate than a reverse mortgage and have a limit that lasts up to 30 years.
So, as long as you’ve built up ‘available credit’ when you quit work, you now have the option to borrow it again.
There are a few terms and conditions and other risks to consider here, so speak to a mortgage adviser to be safe.
That leads us to the newer option of equity sharing, which is inspired by the French concept known as “Viager” (vee-ah-ZHAY).
Instead of taking out another mortgage, retirees can instead sell a portion of their home in exchange for regular ‘income’.
It’s great for those who don’t believe in debt, or who need more certainty. Like all arrangements involving property, big decisions should involve family first.
Whether through debt or equity, arriving at retirement with ‘only’ a debt-free home still offers some options.
Providing you’ve already made a start with retirement planning, the only shield from the spectre of poverty is the choices you make today.
When we’re starting out, when we’re building up, and when we’re winding down, if you anticipate your next life stage, you’re more likely to win the race.
Go big and go early with your first home, invest rather than blitz the mortgage, and don’t be afraid to spend your equity in retirement, especially if there’s nothing else left. Remember, the future is the result of the choices you make today.
- This column is not financial advice. For advice on your individual circumstances, see a financial adviser.
