When it comes to retirement planning, don’t bet the house on it.
“You can’t eat your house” sums up an all too common quandary for a number of retired people in New Zealand.
These folk have paid off their mortgages but at the same time are finding it tough to get by without the regular income that sustained them through their working lives. They discover they’re cash poor, though quite well off in a property owning sense. But edible dwellings, like the gingerbread house discovered by Hansel and Gretel, are indeed the foodstuff of storybooks.
Owning one’s home is an important and worthy goal, and yes, for many of us our residence usually does end up being our largest asset. But the point here is that there are dangers in building a savings strategy solely around the family home.
A New Zealand Treasury study, released back in 2007 prior to the launch of KiwiSaver, highlighted this situation.
It found that the family home accounted for about 70 percent of the wealth of the average New Zealand household
. Many families viewed this as a substitute for saving. Once retired, they planned to downsize their home, which they hoped would give them a lump sum they could then invest to generate extra income.
But the study reported that the effect of doing this is “modest; it is only noticeable when households halve the size of their home
." So… if this is your strategy and you live in a house worth $700,000 now, be prepared to move to a dwelling valued at $350,000 in order to free up the necessary capital.
In fact, the study prompted the architect of KiwiSaver, former Finance Minister Michael Cullen to say: “This is a timely reminder for many New Zealanders to think beyond their investment in the family home if they are to secure their retirement dreams.” (Refer)
Another pitfall is the lack of diversification that results in a ‘home alone’ investment approach. The first rule of Investment 101 is always: spread your risk.
Remember, the real estate market is just another type of market. It has been subject to downturns in the past and it will be again. Have you really spread your risk if as much as 70 percent of your wealth is tied up in a single asset within a single market?
It’s also worth remembering the costs of investing in a home. Many homeowners look at the price they get when they sell a house, subtract what they paid for it and think… “Haven’t I done well!” They forget the interest costs of a long-term mortgage, rates, insurance, maintenance, renovations… the amount paid to live in a house can sometimes outstrip the so-called profit made when the house is sold.
So what’s the best path to take?
By all means, invest in your own home, but don’t let it become the only string to your retirement savings bow. Being involved in a retirement savings scheme such as KiwiSaver
is an effective way to diversify your investments.