Does your house form part of your retirement plan?

NASTASSIA ARENDSE:  Many South Africans worry about having enough money at retirement. Even if they’ve saved their entire working lives they may find that they still come up short of what they need. But what happens if you could use your house as part of your retirement plan?

Henk Appelo is a product developer at Liberty and discusses this with me.

HENK APPELO:  I’m not sure. I think the important point here is planning. You don’t want to be in a situation where you need the money next month to live, otherwise you might be in a bad market and you have to sell at a low price, which means you realise only a portion of the money that you may have been able to get for your house. You can downsize, but you must remember, even for downsizing there are costs.

In the property market buying and selling property isn’t like selling shares or wood next to the road. It’s difficult to sell a property. It’s an illiquid asset, which means they aren’t bought and sold by the hundreds in every neighbourhood.

The second thing is the transaction cost of selling a property is quite high. So you really have to sit and write down all the things that you must consider, maybe with a person who knows what’s going on to advise you properly.

NASTASSIA ARENDSE:  And for somebody like me, who is in their early thirties, in order for you to even be able to avoid a situation where you are approaching your seventies, and retirement is looking a little scary ahead, what can I do now in order to self-correct if I’ve just been dwindling my money?

HENK APPELO:  That’s a good question. For retirement savings there is a bit of a conundrum. When you are young you have time but you have no money. But when you are old you have money but you have no time. I always say this: in saving for your retirement, time is your biggest ally. So you have to give your money time to grow.

Having said that, the appropriate investment is also important. There is no point in saving your money in a money-market fund for 30 years, because you won’t get the benefit of the time. So you have to take the appropriate amount of risk and the money will grow to a substantial amount of money when you need it.

You’ve got to plan. The longer you have to plan, the easier it is to meet your target, like studying for the exams. If the exam is tomorrow it’s going to be really tough to get through all the work. But if the exam is in two weeks’ time and you work with your time nicely, you are going to be fine.

NASTASSIA ARENDSE:  The varying amounts when it comes to saving for retirement? I’ve heard different amounts. What is an acceptable percentage that wouldn’t break the bank, necessarily, but would allow you to at lest gradually increase it every year in line with inflation, if that’s possible.

HENK APPELO:  The rule of thumb is if you have 30 years to save,– you say you are thirty now and you want to retire at 60 or 65 – the rule of thumb is 15% of your salary. If you are doing more than that, then you are doing quite well. If you are doing less than that, you should consider maybe upping it every year a little until you get to an appropriate level.

The reality is you have to trade it off. You have to live your life and you have to save for later. You don’t want to not live your life now, so you can only live it later – and that might never happen. But the opposite is also true. You don’t want to live it all now and then you don’t have anything for later. So it’s a bit of a balance.

NASTASSIA ARENDSE:  I suppose if you are listening to this interview, and you are probably in your late 40s, 50s, and you think you don’t have enough. Maybe the house isn’t even an option for you to want to consider. Is there anything else you could do, perhaps even supplement your income or do some consulting work? They call it the gig economy these days, where you can I suppose even add on more, so that in the next 15, 20 years you are still on track?

HENK APPELO:  Absolutely. One must never discount the value of actually saving, even if it’s only for five years or ten years. If you are aggressively saving for your retirement you can make a big dent in the money, or the money that you need. Don’t despair. Anything that you save is better than nothing. Like you say, there are other options. A lot of people do tend to consult a bit, maybe work a bit longer. Even deferring your retirement by a year or two has a massive implication on the actual amount that you are going to have as an income from your retirement, just from that extra two or three years of growth. Remember, your money grows over your lifetime, essentially. So an extra two years means it’s your lifetime money that grows for another two years. It could be 10 or 20% more money that you end up with.

NASTASSIA ARENDSE:  The one thing I love about our Moneyweb readers and listeners is that they are very engaging. In fact, the moment they hear this interview a lot of them will be looking at how far they are when it comes to retirement, and also looking at the options that you just mentioned with their home.

What are some of the key things you want them to keep in mind right now – to remember and I suppose also practise?

HENK APPELO:  If we focus on the houses, or the home specifically, before you jump you must look. So don’t put all your eggs into the house and think that that’s going to be solving all problems, because you are either going to downsize or you are going to rent it out. Be sure that you know all the ins and outs of whatever arrangement that you are trying to make.

Secondly, the general feeling that I get is that people underestimate the amount of money that you can get off a lump sum. So for a lot of people the biggest amount of money that they’ve got is either their house or their pension fund, and the day they retire and [have] a few million, they’ve never had a few million at their disposal. All of a sudden you think you can’t spend all this money, it’s impossible, and a few years down the line the money drawn out of the investment is slightly too high, and the return that you get is slightly too low, and then you are sitting in dire straits. You want to try and avoid that.

So financial advice is critical, particularly when you go into retirement. Get yourself a good financial advisor. Such a person can also help you with decisions around your house, such a person can also help you use your resources to try and time – so that you don’t have to sell the house for a low value and you actually realise the proper value for your house.

NASTASSIA ARENDSE:  Alright, Hank, thanks so much for your time.

LESIBA MOTHATA:  Pleasure.

Brought to you by Moneyweb