Many South Africans worry about having enough money at retirement. Even if they have saved their entire working lives, they may find that they still come up short of what they need.
These concerns about not being able to generate enough income from retirement savings are one of the biggest causes of financial stress for South African investors. Nobody wants to be dependent on the government or become a burden to their children.
One thing many people in this country have in their favour, however, is that we have a love of physical property. Owning their own home is a priority for a lot of South Africans.
What this means is that upon reaching retirement many people may find that while their pension savings may have fallen short of what they need, they have significant additional value in their homes. In some cases where a house has been owned for many years, the asset they are living in may be worth more than all their other assets combined.
Freeing up this value potentially offers at least a partial solution to their retirement funding problem. However, it is one that has to be very carefully considered, because, of course, they still need somewhere to live.
Mark Lapedus, divisional director for product development at Liberty, says that anyone in this position needs to consider what their options might be.
“You could downsize by selling your home, buying something cheaper and using the difference to live off,” he says. “Or you could sell the property and find something to rent, which frees you up from the responsibility of being a property owner. Which of these you choose is probably going to depend on how short you are in terms of retirement capital, and some people may even transition from one to the other.”
Anyone who is going to sell their property to fund their retirement, must however act prudently. For someone who has not saved at all and the only asset they have is their home, this may be more difficult, but this is a process that should be carefully managed.
This is because, just like any other asset, property values do not move in a straight line. Sellers have to consider the market and whether they are getting full value for their asset. The last thing anyone would want is to realise far less than they could have because they sold at the wrong time.
The current environment is a good example. Apart from a few specific locations, the South African property market in general is depressed. It is therefore probably not the best time to be trying to sell a home.
This means that someone retiring now with limited savings, but a valuable property asset, would need to think very carefully about how long they could live off what they currently have while waiting for house prices to improve. They don’t want to be left in a situation where they are forced to sell in desperation because they have nothing else left, but they also don’t want to lose out on too much potential value.
This is why good financial advice at this stage can be extremely valuable. Formulating a plan for how much someone would need from their property and setting a reasonable selling price based on that rather than on some hopeful estimate of where property prices might go would take some of the emotion out of the decision.
A good financial planner could also help someone determine how long they could reasonably live off their other savings, and at what draw down rate, before they would deplete too much. This would provide a reasonable time frame in which a sale would need to be made.
“Deciding when to sell, for how much, and what to do with the proceeds can all be a very difficult decisions,” says Lapedus. “But good financial advice can go a long way to making that process easier and ensuring that you get the most out of the assets you have.”
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