You retire around age 65 and own a debt free (standard NZ) 4 bedroom 2 bathroom home worth say $600,000 ($900,000 if you live in a good Auckland suburb).
You get joint national superannuation of $28,000 pa. and you have cash and investments of $150,000.
After 7 to 10 years of not-big-spending but having a good life, your $150,000 has been “spent down” to $30,000.
You are now around age 72 to 75. You downsize your house and release another $150,000. So far so good.
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 when the time comes, you are very low on cash - and have to sell - being forced to sell is stressful.
Property crazy Kiwis tend opt believe that property rises 5% to 10% 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 ?
And the bulk of your money in that single asset ? That could hurt !
Diversification is a good friend, and always will be.
Downsizing - when ?
By keeping your big house and downsizing later is not an ideal or efficient investment strategy.
As you gradually sell your investments;
· Either your money is not fully invested
· 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 say age 65, released say $150,000, and invested a total of $300,000.
$300,000 invested at say 6% nett in balanced portfolio, drawing down $1500 pm. or $18,000 pa. will last a tad over 23 years*.
Over the 23 year period it will have returned interest and capital gains of $302,000.
* assumes inflation at 3% and drawings increasing annually by 3%.
$150,000 invested at say 5% nett ( lower return since shorter term) in balanced portfolio , drawing down $1500 pm. or $18,000 pa. - it will run out after 9 years.
Over that 9 year 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 9 - at 3% inflation will need to be $1900 pm.
Hence the 2nd $150,000 will only last 7 years.
And only gain $29,500.
Downsize at age 65 and invest $300,000 – it will pay you $1500 pm, last 23 years and gain $302,000.
$150,000 invested at age 65, downsize in 9 year time, release and invest another $150,000.
All gone after 16 years - and it only earns $39,200 + $29,500 = about $69,000
Money lasting 23 years versus 16 years ! Less stress too.
The enemy of retired people with fixed assets is inflation, and this is a graphic example of just how much.
What about the capital gain from keeping the big house ?
Good point, and it may well compensate a lot - or a bit - or nothing ??
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% in Auckland
- 5.8% in Canterbury
- yes, a decline in many parts of NZ (see “zombie towns” below )
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 7 to 10 years that you kept it longer.
Economists are now referring to “zombie towns” in NZ – those towns that are showing little or no growth, and sadly there are a lot of them.
Put another way, 80% of job growth in NZ over the past 5 years came from Auckland.
If your house is in a “zombie town”, capital gain may well be muted, or absent altogether.
Although zombie towns can be good places - very good places - to live.
Which way is better - an unanswerable questions ?
The figures/theory favour a downsize early in retirement.
But theory is only theory - the variables such as the economy, disasters, the people and how long they 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 2 am daily.
Consequently you are far more likely to get it right when you do it.
Proactive forward planners - bookies choice to win.
Reactive knee jerkers – bookies choice to lose.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge