Are you adequately prepared to fund your retirement property?
Whilst in the midst of raising a family, everyday life and its accompanying financial challenges distract us from contemplating our future when we need to seriously think about scaling down our lifestyle as we approach retirement.
We seldom give enough thought to the ‘golden years’ and, in particular, considering the purchase of that retirement property, which in most cases could be difficult to secure.
Leading wealth and financial advisory firm GTC cautions that acquiring a property - for pensioners - requires careful and timeous planning to prepare for and sustain a consistent retirement income.
“In our interaction with retirees or people about to enter retirement, we find that many savers have given insufficient thought to the purchase costs and ongoing running expenses of aretirement property, and subsequently they have not done enough to transition their financial planning from a monthly salary into a sustainable and sufficient retirement income. In some cases, retirees have received absolutely no guidance or – even worse – the advice provided has been inappropriate.
The consideration of the purchase of a retirement home is not as simple as selling your large family home and buying a smaller one with the proceeds – it is rather the additional costs related to retirement living which often trip up retirees and reduce their net monthly income in the pension years,” says Andrew Edwards, consultant at GTC.
According to Edwards, the biggest factor influencing the funding requirements for a retirement property is determined by the type of property that retirees wish to reside in, and whether - or not - it is important to have ownership.
“We believe that retirement property planning should receive specific attention early on in the accumulation phase of your savings lifecycle. It is recommended that individuals ensure that some retirement planning has been considered when you are in your mid-fifties and definitely at least before turning 60. Even if you are not sure whether you would want to relocate to another property, or which type of property or ownership model this would be, it is crucial to raise the issue of retirement living with your financial advisor in order to incorporate this planning into your retirement income requirements,” he says.
South Africa suffers from a huge shortage of accommodation for the elderly and - according to Arthur Case, CEO of Evergreen Lifestyle – waiting lists for retirement homes are really long and it can take five to 10 years before someone finds a place.
There are numerous options for retirement living, including relocating to a smaller property in the same area, purchasing a property at the seaside or a more rural area, moving abroad or into a lifestyle village with assisted living.
“These choices are influenced by each individual’s circumstances with different factors affecting their funding strategies, though there are some universal factors to consider when planning for retirement living, to ensure that your choices are not impeding your future income stream or putting strain on family relations,” says Edwards.
The most important of these factors is deciding on whether to buy or rent a property, and whether the primary home should be sold – or even possibly rented out - to fund retirementliving, or whether it should remain in the estate for inheritance.
“If you are planning to buy a new property – whether this be freestanding full title homes, sectional title, life rights or even share block options in a retirement village – it is crucial to remember that borrowing money for pensioners is often quite difficult and costly, due to the age of the borrower, and uncertainty regarding the repayment. While the National Credit Act does not allow for borrowers to be discriminated against due to their age, banks are generally more reluctant to lend to pensioners and this would also be considered poor financial planning to borrow so late in one’s life,” says Edwards.
If mortgage financing is required, it may be an option to purchase a second property well before retirement, when financing is more readily available.
“Upon retirement, the balance of the mortgage can be settled by selling the primary family home. Alternatively, after selling their larger family home, pensioners should opt to buy their retirement property for cash, avoiding the burden of mortgage payments as a pensioner.”
If the retirees decide it is important to keep the family home in the estate for their beneficiaries, they will not have access to this portion of capital upon retirement and may have to rely on pension fund lump sums or other maturing investments.
Secondly, retirees need to provide for the ongoing maintenance costs associated with whichever type of property they relocate to.
“Property ownership in retirement villages, or in lifestyle estates, often comes with ongoing monthly levies and fees, associated with property upkeep, such as cleaning and maintenance. Owners or renters also need to take these into account in their monthly planning and budgets. If you are purchasing a property that does not include these items in its levies, additional financing needs to be available to cover these expenses,” says Edwards.
Those pensioners who opt to move abroad should consider the implications of currency conversion rates in the funding of their homes in a different currency, as well as the probable fluctuating cost of providing for living expenses, levies and retirement care-givers, to name but a few of the expenses which will form part of their retirement budget.
“Carers in South Africa - depending on whether they are employed by Government or privately employed - and also on their skill levels - earn on average between R2 600 and R6 900 per month. Their availability and affordability is often taken for granted in South Africa. These are often substantially more in other countries where the minimum wage is higher than that in SA. The requirement to have, and pay for, a carer in your later years, has a significant impact on monthly retirement income streams.”
Thirdly, pensioners need to think very carefully about the funding mechanisms they choose to finance their retirement property.
“There are some products that allow for pensioners to borrow money, but these are often costly due to the higher risk that retirees are deemed to be and may require children to act as guarantors in the event of the parents not being able to finance the loan.”
Rather than incur debt that may eat into your retirement capital, or put strain on family relations, Edwards advises that savers consider all these factors influencing retirement properties very carefully, well before retirement.
“Once these elements are considered, an expert can guide you on how much capital you would need for your ideal retirement property and lifestyle, as well as the best way to finance this. When you have a general idea of the cost of the property and its associated ongoing expenses, you can decide whether you are prepared to set aside an additional amount per month to fund your home, if needs be, or whether you have the capacity to service another mortgage before retirement.”
Alternatively, if you find your current savings do not allow for your ideal home and you are unable to add to your existing level of retirement funding, you can expect your financial advisor to begin guiding you through adjusting your expectations for retirement living based on your financial reality.
“Regardless of which type of property works for you, the key is to start thinking and talking about your ideal retirement living situation early in your financial planning and savings cycle, and to incorporate the above factors in your funding planning to avoid disrupting your pension income due to unplanned expenditure,” concludes Edwards.