Invest For Retirement
65, the significance of this number is well known to all working Kiwis. 65 is the age of entitlement for receiving your NZ Super. For years this has been the benchmark age for retirement. For the current generation, this will be increased to 67 by the 1st of July 2040. Nevertheless, this is milestone on many Kiwis’ professional career they won’t want to miss. This is the moment they have worked towards after countless hours, stringent management of savings and all the colourful daydreaming about the world tours they hope to go on. As financial advisors, our goal is to preferable make your owner-occupied home a freehold (no mortgage) when you reach retirement and have about $800,000 to a million as additional funds for a healthier retirement. Many other online advisers also preach this as a benchmark for a comfortable retirement. You may be wondering how one could accomplish this feat and why it is advisable to plan accordingly. To answer these and other questions we need to first understand how one could use property to build their equity, look at a possible scenario one could follow and finally what to do when you reach retirement. Our advice is free, we want to provide financial services that aids your cause and enables you to achieve your retirement goal. This scenario will not work for everyone and is only intended to illustrate how we can potentially help you plan for your retirement. In any case, you need to get your foot on the property ladder!
The top priority is to purchase your first home. This topic has been discussed on our website before, check it out here. This is a hard but achievable goal, which should be on the top of your to do list until you have moved in. Once you have purchased you first home, the next step is to allow the property’s value to increase, which will increase your equity. At this moment, as a home owner you are entering a passive phase where you must patiently wait for the value of your property to increase. Properties in Auckland, in recent years, have doubled after 10 years. This is a rule of thumb used primarily in Auckland. In each region of New Zealand, it varies, but this is a good benchmark. There will be periods where the value will decrease, but do not be discouraged as this is part and parcel of owning a property. During this low-key period, it is advisable to manage your savings and keep within your annual budget. By using various online valuation websites, you can keep track of your property’s value. Every year, our role is to meet and discuss your financial position. During these annual reviews, we will analyse the market and inform you when it is time to use your equity to purchase a rental property.
Here is a scenario to illustrate the process:
Mr and Mrs Cliché bought their first property in 2012 for $500,000 and took out a loan of $400,000. Their Loan-to-value ratio (LVR) is 80%, which is acceptable for an owner-occupied home. The couple decided they would only pay interest on their loan. In 2017 the couple did a valuation of their house and found it was worth $800,000, an increase of $300,000. Based on this valuation their LVR is now 50%. The couple now have a chance to increase their total loan on their owner-occupied property to a maximum of 80% LVR, which is $640,000, an increase of $240,000. This $240,000 can be used as a deposit to purchase a rental property. Currently (June 2017), the LVR for an existing rental property is 60% and a new build (constructed) is 80%. Due to the couple’s income, they are unable to service a loan for a new build. Therefore, the maximum price of the rental property will be $600,000.
This is but one method to increase your overall equity through property investments. Having an additional property that will grow as time passes will increase your overall return on investment. As you approach retirement the additional properties you purchased will be fully realised and provide you with the comfortable retirement you have always dreamt of.
Finally, the end is nigh for your professional career. By this time, through passive equity creation and a sound financial discipline, your owner-occupied property should have little to no loans owing on it and own two or three rental properties. To achieve the goal, to have a freehold owner-occupied property and $800,000 to a million in your bank account, it is possible to sell your rental properties. The sale proceeds should be used to pay off any remaining loan on your owner-occupied. The rest should be kept in your savings, which should add up to our target.
This is one of many financial plans for retirement. For some it may be more suitable to keep their rental properties and use the rent income to live comfortably. As financial advisors, we will tailor your retirement plan to your wishes. The scenario in this article is but a mere example of how you can achieve a comfortable retirement through property investments.