We all know that government super for a couple is about $27,000 pa. and according to recent research we need more like $40,000 pa. for a moderately comfortable retirement.
Obviously we need to get some other income from somewhere, and as we get well into our 70s it cannot come from work, so it has to come from investments of some kind. It may also be that we have to slowly but surely consume our capital to supplement our National super.
We are often asked about retirement villages and what retired Kiwis should look out for...
If you buy a $400,000 unit in a village and you decide five years later that you want out again, the unit may now be worth say for $425,000. The village operator will want 25% of that figure, so you end up getting about $315,000 – a pretty harsh penalty.
Now this is not a problem if you don’t need to exit, and more importantly, if you don’t need to downsize your house to release more cash later on in retirement.
However many New Zealanders do not have quite enough money saved to last 25 years in retirement. They will at some point need to do downsize their homes to release cash and top up their bank accounts.
My experience is this commonly happens when people are age 78 to 82. They make a move for many reasons such as;
To release cash
The house is too big
Their spouse has passed away and the house seems very empty
The garden is too much to handle
They want to move closer to better medical facilities
Be closer to the family
And so on – dozens of reasons
Let’s assume that a couple is age 68 (wife) and 72 (husband). They have reasonable savings, and are neither rich nor poor. They have a debt free home worth around $600,000, and good health. However their home is a little bit too big and the garden is getting out of control, so they are considering retirement villages.
Keep your fall-back position
In this case I would probably recommend a move to a smaller unit around the $500,000 level but not to a retirement village. Why? To retain a fall-back position. The wife is only 68 and has potentially 20 years to live, but they think their savings will only last 10 to 12 years. Hence, it would be prudent for them to continue to own a home that can appreciate in value.
By moving down to a unit outside a village, they would release around $100,000 to top up their bank account. In addition they would retain full and unencumbered ownership of their unit which leaves them in a nice fall-back position – highly desirable.
At age 78 to 82 (wife’s age) or later, they could sell their unit for say $550,000 and buy a unit in a retirement village for say $450,000, again releasing $100,000 or thereabouts to top up their bank account.
When downsizing to release cash, you need to be careful that real estate agents fees, lawyers’ fees, moving costs, alterations and renovations do not erode your funds too much.
In other words the hoped-for $100,000 can easily drift down to $70,000.
Calculate all your costs carefully before signing any sale or purchase documents.
The key issue – retaining your options
If they went into retirement village now, they would lose that fall-back position for ever. If we run low on money when we are around age 80 or later, we cannot go back to work.
Retirement is about many things and a key component is having access to cash, and retaining as many options as possible.