Our Insights

About personal finance, investments and markets.
September 27, 2016

Don’t rely on your property for your pension

There are many valid reasons for buying your own property – not least historically low interest rates. People also view their own home as a central component of happiness. However, here we do not want to look at the emotional benefits but at the financial rational for investing in a property in order to fund your retirement. In our view, your own property should not be seen as your main retirement solution and here are three reasons why.

1.      Don’t be asset rich and income poor

When you get old, you need additional income to fund your retirement. As long as you live in your own house, it will not generate any additional income. Even if a low mortgage rate means you spend less each month than you did when renting, upkeep can drain a bank account faster than a leaking water heater. Don’t forget the reality of maintenance and repairs. Also when you get older, your current home my not suit your needs anymore. An ideal bathroom for a 70 year old looks different and an additional lift can be very expensive.

If you are looking to stay in your own property, you will need to fund your retirement in different ways.

On the other hand, if you are planning to free up the value of your home by selling and moving to a retirement home, you need to keep in mind that at current interest rates, your money may not go as far as you thought. Annuity rates have fallen significantly, meaning that those locking into a secure income are receiving thousands less income during their retirement than if they had bought an annuity a few years ago.

2.      Don’t put all your eggs in one basket

Conventional wisdom says we should spread our eggs to reduce our risk, but when buying property it makes this very difficult. For most of us, we do not have this money just lying around so we require the assistance of banks to achieve a purchase, through a loan. What this means is that not only are we not spreading our eggs, but we are gearing even more heavily towards the potential success of this asset.

Concentration of risk is something that all investors should be mindful of, regardless of how bullish they are on the specific asset class prospects.

3.      Life changes

Property is an illiquid asset class. This is fine for most people as the intend to stay for a long time, but let’s not forget that life has a habit of throwing surprises. Selling a property does not always happen voluntarily. Sometimes we are forced sellers due to divorce or death of a partner. Or because we move to a different part of the country due to job changes. In all these cases, you might have to sell at the wrong time in the property cycle and you will not be able to realize the value you might have expected.

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