The ‘real’ value of money
IF YOU WANT CHOICES IN RETIREMENT, YOU’RE GOING TO NEED TO PUT A PLAN IN PLACE
This isn’t the sort of plan you may have been told before. You know the one that goes like this: You have to work hard, you have to save hard, you have to invest in super, you have to invest in shares and in retirement you have to sell your property to get cash to live off.
Who’s been told that time and time again?
Well that’s not actually correct. It is more about being smart with your money and separating your life from your investments. At the same time it is important that you are enjoying life all the way through because you don’t want to be the richest man in the graveyard. What happens if the ‘big red bus’ comes along and you haven’t made it to retirement but you haven’t lived because you’re doing everything to save towards retirement? Where is the fun in that? It is important to have balance.
I was a financial planner for 10 years and we taught people to save for retirement like this: During the build up to retirement, we advised to invest in balanced or higher growth funds, which was important because it gave higher returns during the growth phase.
Property values go up over time, putting your money in property should keep your wealth growing in line with the cost of living.”
Five years before retirement, we advised to move from the high-risk funds to cash based investments to retire with cash. The reason being it is lower risk, but it is also lower return. If you don’t change and you are in high-risk funds and let’s say a week before you retire the market crashes (which it can do) you can end up losing more than half your money. So there’s a problem having high-risk investments when you retire, however, there is also a risk to being invested in cash. This is because of the way that money works.
The problem with cash is: Money devalues over time!
As a financial planner, I would actually point out to clients how much money they had, and how long it would probably last because the cost of living goes up which makes the value of money go down.
Let’s say you retire with $500,000 cash invested and imagine you miraculously received a 10% return on the cash investment. This would give you $50,000 per annum income. We are taught that we should be living off the interest. But when you start to live off the interest, guess what happens?
The cost of living goes up so you start spending more than the interest and start to eat into the capital and then you earn less interest because the cost of living goes up and the cycle continues with the money depleting itself until you run out of money. That’s why cash doesn’t work in retirement.
Jack and I chose property for our retirement plan because property values go up over time and so does rent. The reason we don’t sell property is because if you sell property, you’re going to end up with cash.
It’s a fact that money devalues over time. If you just hold money in retirement you’ll have less to spend. You can use money or better still equity to create a property portfolio.
Property values go up over time, putting your money in property should keep your wealth growing in line with the cost of living. What’s more, your rent goes up and your debts reduce, so the more income you will have in retirement. It’s this NPI ‘non-perspiration income’ that helps you to retire comfortably.
While property values usually go up, it doesn’t matter if they don’t. People often worry the property market might not continue to grow at 5% or 10%.
The reason it doesn’t matter is because you should never sell. If you don’t sell the value of property in retirement is irrelevant. You don’t use the equity in retirement, you live off the property ‘return’ (rent) and rent normally increases with the cost of living, thus giving you an ongoing and increasing income for the rest of your life.
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