What should we do for the next eight to twelve years before we retire?
Scenario: Husband 54 years old and wife 49. Total super is $165,000. Own home worth $500,000, with no mortgage. Combined salary is $142,000 a year. No other investments.
ANSWER: Fantastic that you have paid off your home and now ready to focus on retirement, the key objectives should now be determining when you plan to retire, how much income you will need into retirement and what other capital expenses you need to plan for.
Imagine that you are retiring this week and critically assess how much income you will need for day-to-day living expenses. Try living on that amount of money on a day-to-day basis now to make sure that reality is in line with expectations. If you plan to travel, factor that cost into your annual living expenses into retirement. Factor in a budget to spend $8,000 a year on travel in retirement.
The earlier you identify any financial shortfalls, the sooner you can address any required changes for now or into the future. Once you have a handle on your income and capital needs, you will then be in a position to assess how much you have in savings and how it will grow between now and retirement. The variables, other than reducing retirement lifestyle, will be: possibly accessing capital by downsizing the family home or selling other assets; delaying retirement until you can afford it; or easing into retirement by continuing to work part-time.
While investment performance is a consideration, your ability to fund for retirement will typically be constrained by three other factors: your cashflow requirements to live now; time left to save money for the future; and your ability to get as much as possible into the superannuation system. Superannuation remains the most tax-effective investment vehicle to fund retirement. There are generous tax concessions available via super that you should optimise before considering other options. There are limits on how much you can put into super a year. The earlier you start target funding your retirement, the greater likelihood you won't be constrained by these limits.
If there is one time in your life that you should seek advice, it is in planning for your retirement. Find out if you are on the right track by talking to us. If a change of strategy or direction is required, better to find out as early as possible, before it is too late!
Home Loan Goes Wrong
When Tom went looking for the right home loan in January 2008, he thought his many hours of internet research had served him well. Yet now, his 'low rate' home loan has an interest rate much higher than he expected. Would it have been a different story had he instead sought mortgage advice from a finance broker?
In January 2008, Tom and Liz decided it was time to buy their first home as their first baby was on the way.
They were buying a block of land to build on, so not only did they need to finance this new block, but had to refinance their investment property. Their combined borrowing came in at less than $400,000. They had planned to build a new house on the block of land in 12 months time and they estimated that they would have to borrow an additional $550,000 to do this.
They decided Tom would be responsible for searching for their home loan, he was overwhelmed with the differences in rates and fees across the major banks and lenders. Tom checked over a dozen different lenders' home loan products and interest rates.
Researching and researching.....
Tom didn't seek any advice before choosing a lender. Tom didn't know whom to seek advice from and Liz wasn't completely sure of what finance brokers did for borrowers. They didn't know how much they would charge for their services, or if the financial institution they recommended in the end was only suggested because they would get a larger commission. Taking the time to do the research online, they decided to head to over to the Acme Mortgage website for more information.
Their eyes quickly found the table with the Top Ten standard variable rate products. At the time, rates had just started to creep over the 8% mark. However there were two lenders who were very similar in what they offered. Both had no upfront fees, or ongoing fees, and both had extremely competitive rates. Both Tom & Liz were a little skeptical at first because they were scared of borrowing such an enormous amount of money from these 'online only' lenders.
Out of the two, they went with the lender who offered an interest rate that was 0.10% lower. They spoke to them over the phone and they seemed very genuine. They convinced them to avoid the other one because they had a very bad reputation, and in the future, would not be in business in a years time.
They took the risk and decided to join with this lender offering the lower rate. Both lenders got their funds from ING Bank, so they thought, what's the difference? If their rates were going to increase they'd increase proportionally right?
When the rate hikes hit
Finally settlement occurred in May 2008, and they were excited, even boasting, that they had the best rates in Australia.
In the coming months, interest rates kept rising. Tom & Liz got letters in their mailbox monthly notifying them of yet another interest rate rise, one after the other. Strangely though, they watched their lender's rates stay significantly under that of the 'new' rates.
Finally the economy slowed in August, and there was no indication of a rate rise. In fact, there were talks of a decrease on the horizon. At this time, they received another two letters within a month increasing their rates another 0.50% to 9.09% for their land, and 9.19% for their investment property. Their rates were now equivalent to, if not higher than, every other lender's with whom Tom had initially enquired. The lender was unable to explain why this had happened.
When the rates dropped …
In September 2008 the rates dropped, and the average rate was now sitting on 8.84% (land) and 8.94% (investment property), but Tom & Liz’s lender were now advertising '8.39%' for an average standard variable home loan. This is because they now have funding through another bank, but Tom & Liz can't help feeling cheated and robbed. From their own research, they now have the worst rate in Australia.
In addition to this, during the large interest rate drops in October, their rate only dropped 0.70%, where as most other bank lenders dropped almost 2.5% in total decreases.
The importance of seeking additional advice
Seeking advice from a finance broker would have helped Tom & Liz make a more educated decision about their lender and would have meant a better decision could have been made.
Buyer beware! Choosing the wrong loan or lender can be very expensive.