Janine Starks: Eyes on the Prizes of a Good Retirement…

Dear Janine,

I am 69 years old and retiring next month with $ 300,000 to invest in a rental or a bank deposit. We are also building a new home in partnership with our son, costing $ 400,000 (paying half each) and we have set aside the money for this project. This will enable us to halve our living expenses, power, Sky TV and rates. If we buy a rental, our cash is all used up, but it’s a better return than the banks. However we still wish to travel and replace the car soon. The other option is to buy a real cheap rental at $ 250,000 and still leave $ 50,000 for bit of travel and the new car. What do you think is our best option? At present our cash is in Bonus Bonds where we’ve had some luck in past, but they are probably not good enough now.

Financial heaven or hell?Well that made me gasp on a first read – shared home ownership with your son. But when you ponder it more closely, it’s actually quite a clever solution in the right circumstances.

Retirees want to release equity or downsize, but both come with major consequences. Interest rolls up on an equity release scheme and leaves a big dent in your kids’ inheritance. Downsizing leaves you with an inferior home. Joint ownership within a family is financially clever; no interest payments looming on death, a brand new home and your bills will be lower. If your son is an only child, it’s set up for him to inherit the other half. Whatever you do, ensure you both consult separate law firms to ensure all outcomes have been considered. Take advice on whether rest-home rules could have any impact on your joint ownership of the house, if you ended up in care.

Avoid a family spatThere could be financial aggravation if you have more than one child. Has the family sat down to discuss what will happen on your death? A part share in a house occupied by their brother is of no use to them. Why should they be burdened with asking for a sale of the house if he can’t buy them out? All these things need to be put in your will and discussed with your lawyer.

Lumping the lot into a rentalWhen it comes to buying a rental property, the older you get, the more cons there are. I’d be intrigued to know where the idea came from? It’s easy to think younger, because you’ve been there. It’s not so easy to think older, because you haven’t. Even people your own age will falter and forget that health issues and confidence levels all change when you age.

In general financial planning terms, rental properties tend to be for those in their 40s and 50s building wealth, who sell in their 60s and 70s to spend. At age 69, you are talking about going into an asset that can’t be liquidated in small parts. Shame we can’t chisel off the spare room when we are 75 and sell it to fund another big trip. You have the best years of your life immediately in front of you (and by that I mean tomorrow, not when you are 80). You’d be giving up the flexibility to eat your capital in chunks during this time. It still might be what you want to do. You may be the sort of person who would rather give it to their kids.

Beware the false yield trapI’d dispute the notion that a rental will produce a better income. Owners often underestimate the real costs of a rental. It becomes a false yield trap where you tell yourself it’s one number, but the annual accounts show a different one. I know people who look at their tax returns every year and say “well the shower won’t break again, so the yield will be back to normal”. They think it’s all a one-off anomaly.

Weigh up the pros and cons of a rental very carefully. Take some advice from an authorised financial adviser and get them to show you alternatives.

If you want part of your savings in something that could produce gains, but with more liquidity, take a look at a proportion going into unit trusts. Yes, they are a lot more risky than deposits, but if it’s only a small amount of your savings, it dilutes risk.

You’ll be dead by thenWhen it comes to deposits, retirees have a tendency to invest in 1 year fixed interest rates (around 4.2 per cent gross) and treat 5-year rates like green bananas: “I’ll be dead before they mature”. You can get 5 per cent with a five-year fix and ask for quarterly interest payments. And who cares if you are dead before they mature? Your kids will have less hassle liquidating a fixed deposit than a rental property.

You must keep some cash liquid and you were discussing $ 50,000 for a car and travel. That’s very sensible and an absolute necessity. It goes without saying that Bonus Bonds should not be relied on as a sensible retirement tool. Get your kicks out of the odd Lotto ticket instead.

Janine Starks is co-managing director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.

- © Fairfax NZ News

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