Recently I met some people age 50 who were debt free and saving $2,000 per month. They were nicely on track to retire at age 65 with about $400,000 in savings – not rich but comfortable. [details changed significantly to protect privacy--ed]...
- National super of about $27,000 p.a.
- another $20,000 pa. from the $400,000 at 5% pa net.
- a retirement income of $47,000 pa.
- even so they could run low on money in their 80’s, especially if there is some inflation
Now these people are earning good money and are good savers, so it is entirely possible for them to retire at age 65 in reasonable comfort.
They were also planning to upgrade their house, for which they had set aside $100,000 and it looked quite achievable. So far so good!
The next thing I heard was that they had to spend $250,000 to get the house they wanted and so they had gone and borrowed another $150,000. Repaying this loan will take them 8 years at $2,000 per month and the mortgage interest will be about $40,000. The $2,000 per month that was going to savings will now go to the new mortgage for 8 years.
Clearly this will blow their plan to retire comfortably at age 65 out of the water.
Now we know that Kiwis love their homes /property as an investment and why not, for the most part property has been good to us. However in this situation perhaps a bigger better house was just “one house too far”. Yes they will have a nice house at age 65 but within a year or two they will have to sell it and downsize if they want a comfortable retirement.
What they really needed to do was decide which was more important - a comfortable retirement at 65 or living in a bigger brighter home.
A personal choice of course, but in some ways it is a shame because they now have extra pressure and stress of a mortgage to pay off.
In addition there is no such thing as job security any more, particularly if you are over 50.
Last not least of course there are health issues and we can’t necessarily rely on our health as we get older. Therefore being debt free and having a pile of retirement savings in our 50’s is a pretty desirable position to be in.
It comes down very much to careful decision-making and perhaps using a process where you write down the pros and cons of your plan, be brutally honest with yourself, and take your time before making a decision.
To get ahead financially we have to be good at removing the rose coloured glasses we sometimes wear when making decisions.
I wonder how many couples in NZ live in a big house with four bedrooms and just 2 of them at home 98% of the time.
If we assume that a nice four-bedroom home in NZ will cost say $400,000 to $700,000, a smaller home or unit might cost $300,000 to $500,000.
That means a lot of us have some $150,000 to $250,000 tied up in empty rooms that our children may use on those occasional visits. Does this make any sense when one is approaching retirement, or is retired ?
How to avoid retirement killer number two
The big house ?
Take off the rose coloured glasses.
Be brutally honest with yourself – can you afford it ?
Do you want to have to work longer ? Choosing to is one thing, having to is another.
Think about those empty bedrooms and what are they really costing you ?
Consider getting professional advice for your retirement planning and review it at least once a year. If you are planning to make a major financial decision, return to your adviser and discuss it with them first.
The adviser will not be emotionally involved with your affairs and in many cases will be able to help you see some scenarios that you may have overlooked.
For example I recently saw some people who had 3 kids ages 10-15 considering a small holding some 30km away from their children’s many activities. Cars cost enough to run without even more motoring – say 10,000 km a year at about 70 cents per km - an extra $7,000 pa - in a car with all the lost time that goes with it. It may have been better for them to wait 5 or 6 years till at least 2 of the kids have left home and then move.
If you don’t make a plan, you may be planning to fail. Good luck.