The Reverse Mortgage: an underutilised retirement planning tool?

160430.Reverse Mortgage

Australians’ wealth concentrated in the family home …

We have long been of the view that Australians, in general, have too much wealth tied up in the family home. For those at or near retirement, a corollary is that they often have insufficient investment assets to support their desired lifestyle for an extended period without needing to downsize or being prepared to survive beyond some unknown future time on the age pension.

This unsatisfactory situation is revealed by a measure of financial independence that we call the “Investment Wealth Ratio” (“IWR”). As a “rule of thumb”, we suggest that at retirement at least 55% of total wealth should be held in investment assets and, correspondingly, less than 45% in the family home and other lifestyle assets. But most Australian households either approaching or in retirement have an IWR significantly less than 55%.

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Your emotions complicate investment decision making

Your emotions complicate investment decision making
Lifestyle asset decisions have a heavy emotional content

It’s not always clear what’s a lifestyle asset versus an investment asset. Recent discussions with a client regarding a proposed holiday house purchase raised some interesting issues not only in relation to this matter but regarding investment assets, more generally.

In this case, the client expected that the holiday house would be available for rent for most of the year, with the family using it only for a couple of weeks during peak holiday periods. Based on previous net rental income figures, the return on the property would exceed the current cost of borrowing.

The client’s reasonable view was that because of the anticipated net income, the property should be regarded as an investment asset rather than a lifestyle asset. Further, given the likely reliability of that income, he questioned whether it could be considered as an alternative to holding low yielding, high credit quality, defensive assets.

We were not comfortable with the “defensive asset” alternative idea, given that prices of holiday homes fluctuate considerably and, in poor markets, there is often little liquidity. However, a typical response to this view is that there is generally no intention to ever sell a holiday home. Often, it’s regarded as an asset for the family to enjoy and, potentially, to be passed on to the children.

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“wealthcheck” for early career professionals

wealthcheck for early career professionals
By your late 30’s, your decisions may have significantly shaped your financial future

In a previous article, “ ‘wealthcheck’ and retirement preparedness”, we used the “wealthcheck” framework to compare the financial vulnerability of two, apparently similarly placed, pre-retirees. We also claimed that the framework was just as applicable to assessing the financial soundness of early accumulators.

To demonstrate, this article compares the situation of two (fictitious) couples, the Blacks and the Whites, who are both successful young professionals and 27 years away from their nominated retirements. While retirement seems a long way off, the “wealthcheck” framework reveals that financial decisions made at this stage of life can significantly limit future financial flexibility and, perhaps, make you unnecessarily vulnerable to financial disappointment.

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How is your wealth split between lifestyle and investment assets?


How is your wealth split between lifestyle and investment assets?Your Investment Wealth Ratio is revealing

In our previous article, we introduced the Personal Financial Dashboard – our six chart, graphic format for capturing clients’ progress on the path to their version of financial independence. We also discussed in some detail Chart 1 of the Dashboard, that shows both historic and projected growth in net worth and net wealth.

But absolute measures of net worth and net investment wealth don’t, on their own, tell us much about financial independence. For example, net investment wealth of $2 million may be more than enough if you only spend $60,000 p.a. but totally inadequate if you want to support a $150,000 p.a. lifestyle. Charts 2-6 serve to collectively provide a sharper picture of what financial independence entails.

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Has your home been a good “investment”?

Has your home been a good “investment”?

Most compare the current house value with the purchase price …

Like me, you probably often hear long term home owners making statements such as:

“I bought this place in 1982 for $200,000 and it has to be worth $2 million now.”

The suggestion is that the home has been a fantastic investment and reinforces a widely held view that you just can’t go wrong with property.

The real estate sections of newspapers, when reporting on recent house sales, also like to refer to the last traded price. In Sydney, at least, if this last sale occurred longer than twenty years ago the increase in value will almost certainly appear impressive.

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