Pay off the house or save for retirement?

[Gerrard]

If you have a personal homeloan (ignoring IP's for now) are you pumping every spare dollar into reducing that debt, or are you putting some of it into other investments (e.g. managed funds etc) as retrement savings?

I'm interested in what other forumites are doing and why.

Gerrard

[Julian]

What other people are doing should have no bearing on what you do. What you do should be based on what works best for you with your circumstances. Lemmings run with the crowd, and look what happens to them.

Julian

[Gerrard]

Yeah, but I'm interested as to WHY people are doing either or. What they see as the advantages and disadvantages.

Personally, I'm working hard on my homeloan because the cost of that is higher than the benefit of most retirement schemes. However I recognise that starting early with some kind of retirement savings is good for building it up (the compound benefit), and I'm wary of having all my investments in property.

So, for those who have made a concious decision to pay off the home loan first, or are also working on some non-property investments at the same time, why have you decided to go down these paths?

Thanks
Gerrard

[RentMaster]

Hi Gerrard

I have not yet got to the stage of specific retirement funds.

My properties will be my retirement fund.

I actually think your own home loan IS a retirement fund. If you retire with a mortgage, then you need to retire with a lot more money than if you lived their without the hassle of the mortgage. I suppose what it comes down to, is if the income received from an alternative fund, will return a higher percentage to what you are paying on the mortgage. So if the mortgage is costing you 7%, then the retirement scheme needs to return more than 7% to come out ahead.

[drelly]

As Julian pointed out, what you should be doing is going to be different to what someone else should do.

However, I've always advised people to do both at once because as a general rule, most people don't pay off their home mortgage (and leave it paid off) anywhere near early enough to be able to save effectively for their retirement.

The average age the last mortgage is paid off in NZ is 55. This leaves only 10 years to save for retirement. Nowhere near enough time. Most people are simply not disciplined enough with money to do it the way they should and be mortgage free well before age 40 and then not get into debt and save as much as they should after.

I've had many clients pay off debt with all the best intentions of saving but it rarely happens.

[fudosan]

Drelly has a very good point. Sadly, discipline is somthing that comes from within and there is nothing other people can help.

[kalovatt]

I bought the majority of my IP's first before I bought my own place to live in, but that was more a factor of my personal circumstances than anything (was single and flatting etc then later bought house with wife-to-be etc etc), and this actually worked very well. Once we had a personal mortgage we went hard out on that (with the IP's sitting on interest-only) then once that was gone, we had a good head start on investment property

But as previously said, that was just what suited me the best. The advantage was that I bought my PPOR at a market low, with some experience behind me with properties etc, then with the recent boom, both the PPOR and the IP's increased in value.

[Dean@Massiveaction]

I actually think your own home loan IS a retirement fund

Actually your own home is a liability till the day you die. You can leverage its' equity to buy assets, but this country is full of people who think their home is an asset, retire broke and have to sell.
I like to combine Rob Kiyosaki's and Jamie Macintyre's definition of assets. An asset is "something that puts money in your pocket every month", "while you sleep"

[drelly]

Hey Pooomba,

How about those reverse equity mortgages? They scare me as I think they'll become more and more common. The retired person uses all their equity to provide income... a health issue arises and then there's no equity there to provide for healthcare or a rest home! Huge burden on their children and/or the state.

[fudosan]

How about those reverse equity mortgages?

They should be labelled "a LOAN for life".

[Dean@Massiveaction]

Hey Dave,
Yeah they are a bit scary. For someone who doesn't have to worry about leaving an inheritance for their kids though it can be a way to enjoy their retirement. After all you don't care about debt on your house once you're dead!!
The worst part is that most of the companies let you gear so highly and capitalise the interest that the kids could be left with a debt even after selling the house!!

[graemeh]

The worst part is that most of the companies let you gear so highly and capitalise the interest that the kids could be left with a debt even after selling the house!!

This is a risk that the company offering the loan takes. If there is a debt once the house is sold that is the companies problem. The estate is left with the debt, the kids don't have to pay it.

[roseneath_rat]

As for saving for retirement, I've seen a lot of clients in the position of having a mortgage-free home & nothing else at age 60. You can't eat your house.

Don't get hung up on the term "retirement savings" ... its just a term that salespeople use for types of managed funds. Any investment that is intended to fund your lifestyle after you stop working can be called retirement savings.

Reverse-annuity mortgages... *shudder* Whats wrong with a simple 'sell & rent back' option instead? A lot cheaper that way.