Don’t rely on your home for retirement capital
10 October 2019 Hardi Swart CFP®, Director of Autus Private Clients and Financial Planner of the Year 2019
Your home is your castle. Of course, it is! But don’t think for a minute that your castle will provide for you in retirement. Read on if you’re thinking about downsizing one day to release some of the wealth locked up in your home, or if you’re planning to sell and rent another home, or to simply rent out your home in retirement. These are risky decisions.
Hedge your bets
The first reason why you shouldn’t rely on your home for retirement capital is that doing so negates the most important investment rule: Diversify to minimise risk. A lot can go wrong if you put all your eggs in one basket. That’s not to say that property shouldn’t be included in a well-diversified portfolio – it should, just not your primary residence. Your home is what’s called a “lifestyle asset”, which means that it comes with considerable expenses. Spending money on maintenance reduces the perceived growth of the property value over time. (Better property investments for diversification include Real Estate Investment Trusts – REITS – property unit trusts, shares in listed property companies, or a property owned purely for rental income and growth.)
The other risk is the lack of liquidity. When you retire and you need the money, the property market might be in a slump, as it is now in South Africa, and it might take a long time to sell.
Opportunity costs and better options
If you rely on your home for retirement capital, you’ll lose out on the opportunity of greater growth in other asset classes, such as shares. The growth rate of a primary residence property has largely kept up with inflation over the last decade, which on average has been just over 5%. In comparison, the return on equity (shares) over the same period has been more than 11%, excluding the magical benefit of compound interest on the growth.
Then there are the costs of selling your primary residence: You have to pay capital gains tax on any gains in excess of R2 million, plus you have to factor in the cost of sprucing up your home to sell, the cost of moving, and the estate agent’s fee, which might be up to 7% plus VAT on the selling price. If you sell your home to downsize and you don’t buy into a new development, you’re also up for transfer duty, which is calculated on the value of the smaller home you purchase.
Keeping your home for rental income in retirement comes with its own challenges: You’ll still be liable for maintenance, you might have to deal with tricky tenants, and your income may not be consistent. You’ll benefit from the tax-deductibility of the rental expenses, but maintenance time does mean loss of well-earned precious leisure time.
What about estate planning?
If you invest in your home for retirement, when you pass away it will be subject to estate duty. If you invest in a retirement fund like an RA, however, that fund is not considered a part of your estate and thus not dutiable.
Times are changing
Homeownership, in general, seems to be decreasing around the world. It’s down dramatically in the US, Australia, Ireland, Japan and many other countries, mostly due to demographics and the change in value systems. More people are going to university than ever before and investing in themselves rather than homes. Careers have also become more flexible and migration between countries and regions is more common. In a world where many people can travel and work from anywhere over email and Skype, it’s hardly surprising that fewer people want to be tied to a 30-year mortgage.
Remove the emotion
At the end of the day, it pays to be dispassionate. Politics in South Africa can change on a whim and there’s general uncertainty around the world. Love your home and treat yourself to a good lifestyle, but don’t get hooked on the idea that your house is your golden ticket. Rather consult with a trusted CERTIFIED FINANCIAL PLANNER® professional, who will be able to help you diversify your portfolio and structure investment alternatives that will be safer and more valuable in the long term.
The Financial Planning Institute of Southern Africa (FPI), a South African Qualifications Authority (SAQA) recognised professional body for financial planners, which serves the public by ensuring that people who carry the CFP®
designation are qualified, experienced and professional. FPI has recently been approved by the South Africa Revenue Service (SARS) as a Recognised Controlling Body (RCB).
The Institute is also recognised internationally and is a founding, and a current affiliate member, of the international Financial Planning Standards Board Ltd (FPSB)
based in the USA, along with 25 other affiliate member countries who offer CFP®
certification, the highest recognised professional designation worldwide for a financial planning professional. For more, visit www.fpi.co.za
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