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My Parent's Situation

Discussion in 'Investing Strategies' started by abhiramv, 6th Mar, 2007.

  1. abhiramv

    abhiramv New Member

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    Location:
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    Hi,

    My parents came to this country fairy late in their life with little saving. They currently own a house with 100K still left to pay. PPOR is all they have interms of assets I am a worried that when they retire they will not have enough to support their retirement. Their super combined will be at most 200K.

    My Dad is 62 and earning 40K and my mom is 52 earning 25K. I know they should really be talking to a FP. DO you guys have any sugegstion on what they could do to fund their retirement or is it all too late?

    Thanks
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The general situation many retirees find themselves in is being "asset rich, cash poor" ... meaning they have all their wealth tied up in their home - which is not easily turned into cash.

    There are some options to look into (none of this is a recommendation, just some things for you to research):

    - reverse mortgages
    - equity loan drawn down to purchase income producing assets
    - living on equity (living on growth)

    The key questions will be - when are they planning to retire, can you get a full 7-10 year market cycle through in that time (possibly not if your Dad is already 62), what is their tolerance to debt, what are their plans for retirement, what are their intentions in regards to leaving assets for the next generation.

    Unless they intend to live a very simple and frugal life in retirement, I think they should expect to not have much left for inheritence - that is probably the biggest thing (in my non-expert opinion) which stops retirees from living a decent life ... the belief that they must leave assets for the next generation.

    Of course, as the recipient of that inheritence (or denied recipient), it can be difficult to accept - especially if you had always expected that windfall ... but I figure that I care enough for my parents that I want to see them living comfortably in retirement and not in effective poverty like many retirees do.

    The number one suggestion I would have is - don't let them give away their assets, or give away control of their assets, of give away the future growth from their assets - if they can avoid it. Some types of reverse mortgage see you lose all control over the asset - you end up taking on all the risk with none of the potential upside - all in the name of a modest income stream. I think there are generally better alternatives. Lots of research is required there.

    Hope this gives you some stuff to think about.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi ABH and welcome to InvestEd.

    No it's never too late! Some key questions, which they'll need to think about whether or not they see a FP are:

    1) how much are they worth? For example, there's a big difference between only owing $100k on a house worth $1m and owing that much on a house worth $200k.

    2) How much are their living expenses and therefore how much free cash flow do they have?

    3) How long until they plan to retire. Health is obviously a factor here, as is the amount of capital they need to accumulate...

    4) Whilst you've got to dream big, are their expectations realistic given they're perhaps starting a little late?

    5) What is their attitude to risk and how much experience do they have with investing. I'm guessing they are risk adverse and have little investing experience (but that could be way off). Flowing from that is a sober consideration of how much financial risk is it sensible to expose them to at this time in their lives.

    6) Access to pension and other social security measures may be important contributors to their retirement incomes. As such you should carefully check with any FP and/or Centrelink impact of any proposed investments/actions on any entitlements which may be available so that an informed decision can be made as to pros and cons.

    7) Do they really want to do something or are you just feeling guilty that you're not doing more for them? I don't say that to be rude, but you say you are "worried". My question is are they worried? To mix my metaphors a bit, you can lead a horse to water but you can't change the financial attitudes and habits of a lifetime over night...
    Perhaps they should be concerned but if they're happy and don't want to change then you can't try to impose your views on them. All you can do is lead by example. :rolleyes:

    Others will have more issues to consider

    Good luck with it.

    Cheers
    N.
     
  4. abhiramv

    abhiramv New Member

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    Hi guys thanks for your prompt reply


    Sim

    My dad will retire at 65 most likely. My mum could possibly benefit from the 7-10 year market cycle.

    Me and my siblings do not expect any inheritance and I just want to make sure they have enough to live their reirement comfortably. eg pursue a hobby if they wish, or visit family overcease. I am sure they feel they need to leave something behind for us becuase of our culture even if we said we don't want anything.

    They are currently making enough to live and pay the mortgage. Not much interms of additonal savings. So if they live on equity or rever mortgage how long can they fund their retirement assuming they need current levels of income e.g 65K.



    1. House was worth 350K in 1997 so I am guessing between 500-600K now.

    2. Living expenses equvalent to 65K for both to maintain current levels.

    3. My dad can retire at 65 but he wants to work atleats part time since he is restless doing nothing at home, and he doesn't really have a passion for anything like a hobby. My mom is in child care.

    4. No big expectation, I will be happy if they could live like they do now when they stop working.

    5. Nil, last thing I want is for them to loose what litte they have by taking unnecessary risk. However if they can't support them selves after retirement with the current situation then risk is warrented!

    6. Will Do

    7. If its enough to fund their retirement with the equity in the house, super and pension, then I am happy to leave things as they are. Just don't weant any surprises thats all.


    Thank you again for your help
     
  5. coopranos

    coopranos Well-Known Member

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    like Nigel said, it is difficult to offer opinions without knowing the current situation. The options available differ dramatically if there is $50k equity available in the house to if there is $400k equity.
    A lot of retirees have an unfortunate mentality that really prevents them getting the most out of their golden years in that they refuse to let go of the house they have spent so many years plugging away at paying off. They are sitting on assets that could allow a much more comfortable retirement because they grew up in an era where home ownership was very much linked to individual success.
    Personally I dont understand this, but then again I have grown up in much different times than they.
    Just to throw another option out there for you - although say $300k wont get a tremendous retirement with Australia's cost of living, there are many countries in the world where that amount would allow a very comfortable retirement lifestyle (and many such countries have retiree visas available).
     
  6. coopranos

    coopranos Well-Known Member

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    mate, things arent too bleak at all for your parents I dont think - they are sitting on $500k in equity and $200k in super. Definitely worth having a chat to a FP about it, but they have some decent options open to them, which will probably only get better if the Sydney property market takes off again over the next few years. If your dad can go part time and get $15-20K a year for a few years, then sell the house in the next property market run they should have plenty available.
     
  7. BSB

    BSB Well-Known Member

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    Centrelink have a free service provided by their Financial Information Services (FIS) officers whereby those nearing retirement can make an appointment to discuss their individual situations and what options (pensions, assest tests etc...) may be applicable to them. They don't offer advice per se, rather they spell out the current rules/legislation and how it might affect people as they hit retirement. Better to have a few years to plan for these things rather than at the last minute.
     
  8. abhiramv

    abhiramv New Member

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    Thank you all for your suggestion. I will take that all that on board and drag my parents to see a financial planner.
     
  9. Jacque

    Jacque Team InvestEd

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    Just make sure that the FP is as independent as possible and is not going to be influenced by the commission made on the funds he/she is advocating. After all, this may not be the best option for your parents particular situation. I'd be definitely going the FIS suggestion first and taking it from there. Good luck.
     
  10. Tizzy

    Tizzy Well-Known Member

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    I applaud the recommendation to talk to a Centrelink finance officer first. Won't cost you anything and worth getting an education about current legislation and entitlements. Then they can go and see a private financial consultant of their choice. From info you've given, I don't think your parents situation looks that bad. Even if they were still paying off their morgage at retirement, a refinance might be able to spread the repayments so they are a lot less than current rents anyway.