11 September 18
Cash poor, yet rich?
Longer life expectancies, increased property values and rising costs of living mean that an increasing number of Kiwis are finding they’re “asset rich and cash poor”.
They typically have valuable assets (usually their own home), but no cash on hand or meaningful income to give them the choices, freedom and security that wealth should provide.
As a financial adviser, recent examples I’ve come across include:
- A 74-year-old man living in his own million-dollar home, but who pays for his wife’s care and is quickly running out of funds to meet the costs. The rates bill, insurance and maintenance on his home are now significantly more than when he purchased it many years ago.
- A couple aged 59 and 60, wanting to retire before qualifying for NZ Super, but who can’t because most of their wealth is held in the $1.3 million-dollar home they just moved into, as well as KiwiSaver, which is locked up until age 65. This means they must work for longer to build a retirement nest egg.
Here are four practical things you can do to avoid having a whole lot of house and not much to live on.
This is the first principle of investing, and most would say it’s the most important. Ensuring most of your wealth isn’t all held in one investment (like your own home) is key so you don’t miss out on other investment opportunities and aren’t exposing nearly all your worth to risks such as an earthquake or other natural disasters.
Investing in a range of areas will also help you have the freedom to make good choices and help you sleep at night knowing all your eggs aren’t in one basket.
2. Plan ahead.
Think carefully before you buy a home – with the aim of ensuring you can still live the life you want even if your circumstances change in the future. Planning is nearly always time well spent, and to help you there are plenty of great tools to ensure you’re on track for your retirement, such as Sorted’s retirement planner.
3. Don’t put extra money where you can’t get to it.
Some investments have strict withdrawal criteria, so you can’t access your funds if your circumstances change. For example, the most likely withdrawal criteria for KiwiSaver are for a first home or retirement – currently set at age 65.
Once you’ve obtained the minimum benefits for a scheme like KiwiSaver, there are plenty of more flexible investment options available instead. To avoid having much of your wealth trapped, make sure you look into other options!
4. Downsize your home.
If you’re already in the position of being asset rich and cash poor, downsizing to a smaller home can unlock the value held in your home and reduce expenses such as upkeep and insurance. For many, this will also suit their lifestyle, as they no longer need the spare bedrooms, outdoor areas which require upkeep, or those who are slowing down and may struggle with stairs.
Of course, downsizing does have one-off costs of its own, such as moving costs and legal fees.
5. If all else fails, consider a reverse mortgage.
If for some reason you can’t downsize, a reverse mortgage may be an option. Reverse mortgages allow a homeowner to continue living in their own home without being required to repay the loan.
In exchange, the lender (usually a bank) receives a substantial part of the home's equity, or value. The lender gets their money back, plus interest, when your house is sold – which is usually when you go into full-time care or die.
Within the industry, most agree that reverse mortgages are not a good idea and should only be entered after very robust legal and financial advice.
The bottom line
If you find yourself in the position of being asset rich and cash poor, downsizing and possibly a reverse mortgage may be your only options. The best way to avoid this situation is by planning, diversification and investing at least some of your funds in a flexible way.
Joseph Darby is an authorised financial adviser and CEO of Milestone Direct Ltd. Views and opinions here are his own, not necessarily those of Milestone Direct Ltd. A free disclosure statement is available on request.