Advice on strategy for Retirees?

[jmillar]

Hi all,

I'm asking the following questions on behalf of my parents who are very hard workers but unfortunately were not provided with the education to learn about how to best manage their finances, as they have spent their whole lives fighting to survive. They are currently assessing their options as they are both retired and have no income. They have spoken to a "financial advisor" who has told them to stay away from property but would like to hear your thoughts on their situation so they know what other options are out there:

- 55 and 64 years old
- Both retired (one is establishing a business at present but nothing stable)
- Own PPOR - worth $1.3M
- $250k cash
- No income streams

They would like to use their equity to create a passive income but are unsure of how to do this and if it is possible given they have no income at present. I assume equity is as good as cash and they could possibly go out and buy a high yielding commercial property in cash/equity?

Also, to throw another spanner in the works, one of my parents is in a court case which has been dragging on for some years. Against my advice, they will not drop the case as there is literally nothing to gain, but on principal they will not drop it as they have been hard-done by. They have mentioned they would like to mortgage the PPOR so that if the other party sues back then they cannot get anything. However, my understanding is that if there is a mortgage then the house would have to be sold, with the funds owing to the bank paid, with the remaining funds going to the other party? So mortgaging the property makes no difference to this.. I have told them to speak to their accountant and lawyer but it wouldn't hurt to gather your thoughts on this also...

I have established my investment strategy and done plenty of research pertaining to this but unfortunately none of this information helps with regards to my parents' situation. My parents do not have the capacity to research this themselves; unfortunately because they are so warm-hearted, they are often taken advantage of and I would like to do all I possibly can to guide them to ensure that they have not worked all their lives only for it to be wasted away because of bad advice or someone else's ulterior motive.

Any help would be much appreciated on this one.

John

 

[alexlee]

A strategy has to fit their risk appetite. You need to understand what sort of debt levels and what sort of investments they would be comfortable with.

Those numbers suggest a very risk adverse couple. Sure, you can put them into shares or property or whatever, but if it causes them to lose sleep at night, is that what they / you want?

They have no income to offset negative gearing. No other income may mean they can buy shares and get franking credits back, for example, but inevitable there will be ups and downs. Are your parents ok with that? History suggests they have never invested.

Equity is NOT cash. Equity is assets you can borrow against. Note the word borrow. In your parents case, they have no other serviceability so that will limit how much the bank will lend on the equity.

 

[Terry_w]

I was going to say Equity is not as good as cash too. Retires wind find it very hard to borrow if they are not working.

As for the court case, expect your parents to lose half of their house. Getting a mortgage won't help at all because they will be borrowing money. Borrowed money is 'property' available to creditors. If the loan is used to buy a property this property will be up for grabs.

 

[alexlee]

Terry, realistically, what sort of LVR / cashout would be available to a couple in their 60s with no other income?

 

[Terry_w]

Terry, realistically, what sort of LVR / cashout would be available to a couple in their 60s with no other income?

about $0.

A reverse mortgage may be possible?

 

[Scott No Mates]

Consider selling the ppor and moving to a retirement village.

 

[jmillar]

A strategy has to fit their risk appetite. You need to understand what sort of debt levels and what sort of investments they would be comfortable with.

Those numbers suggest a very risk adverse couple. Sure, you can put them into shares or property or whatever, but if it causes them to lose sleep at night, is that what they / you want?

They have no income to offset negative gearing. No other income may mean they can buy shares and get franking credits back, for example, but inevitable there will be ups and downs. Are your parents ok with that? History suggests they have never invested.

Equity is NOT cash. Equity is assets you can borrow against. Note the word borrow. In your parents case, they have no other serviceability so that will limit how much the bank will lend on the equity.

Hi Alex,

Thanks for your response. My parents are not as risk adverse as my OP suggests - they have just sold 4 properties which they had across Australia. Given their age and situation, obviously they would not be wanting to take a high risk, but will look at options which will turn their equity into a cash flow.

I was going to say Equity is not as good as cash too. Retires wind find it very hard to borrow if they are not working.

As for the court case, expect your parents to lose half of their house. Getting a mortgage won't help at all because they will be borrowing money. Borrowed money is 'property' available to creditors. If the loan is used to buy a property this property will be up for grabs.

Thanks for your response Terry.

about $0.

A reverse mortgage may be possible?

Hi Terry. We will have to look into this option, as we are currently unsure of how this works.

Consider selling the ppor and moving to a retirement village.

Hi Scott,

I should have mentioned, we live on 5 acres in an area which is slowly being redeveloped. Land about 5-10kms from our house has just been rezoned to residential and developers are starting to buy up. It may be another 5-10 years until our area is rezoned, but my parents would not consider selling before this.

Also, a retirement village is not an option. My parents are very active people who would not live on anything less than 5 acres. So selling is off the cards.

Cheers

 

[alexlee]

Thanks for your response. My parents are not as risk adverse as my OP suggests - they have just sold 4 properties which they had across Australia. Given their age and situation, obviously they would not be wanting to take a high risk, but will look at options which will turn their equity into a cash flow.

Equity is only as good as the bank willing to lend on it. Their problem now isn't even how much risk they want to take, but they'll find it very difficult to use the equity without selling. On the other hand, if they'd kept the 4 properties, they would have had more asset exposure.

 

[Tulamalula]

55 and 64 is not time for a retirement village!!!!!

 

[TPI]

Is the 250k cash in super?

Do they have other funds in super?

 

[Aaron_C]

Terry, realistically, what sort of LVR / cashout would be available to a couple in their 60s with no other income?

Under NCCP probably not much but if you do a reverse mortgage you will get some lowish (~50%) LVR out of it. Although I can't see any financial advisor asking people who are 60 and retired to gear up and invest lest the PI insurance risk of doing so.

 

[Aaron_C]

They would like to use their equity to create a passive income but are unsure of how to do this and if it is possible given they have no income at present. I assume equity is as good as cash and they could possibly go out and buy a high yielding commercial property in cash/equity?

The only way for them to do it is to take a risk with debt. There is no other way, apart from selling their PPOR and renting while investing the tax-free proceeds into property. What will probably happen in their situation is they will end up not doing anything and live off their cash and their pension. No lender will touch them due to NCCP anyways as no one wants to end up on A Current Affair answering questions as to why they gave a $500k to a retired couple with no income.

 

[westminster]

My first question would be
1. Why are they retired if they have no income? What was their plan which prompted them to stop work?

At 55 and 64 I would assume they would have to work until they can access their Super or govt pension.

 

[Joe D]

With those figures, I would have thought they would be eligible for full or part aged pension within 12 months (ie. 65).

There are a lot of specialists in retirement planning who may be able to show your parents how to optimise the limited funds they currently have in conjunction with a pension.

I can't recommend any, but you see their advertisements in all the newspapers and magazines.

 

[alexlee]

The fact is, it doesn't sound like they had a plan when they sold the properties. Just a vague 'let's get rid of all the debt, reduce our risk' thing. But that's short sighted when they still need their money to last another 30+ years.

While this doesn't help them at this point, jmillar, you need to understand how lending works: how banks lend, what they lend on, and when they don't.

 

[virgo]

Have equity no cash

Hiya

Google some old threads of Keithj...he had some interesting ideas of "converting" equity into cash.....

 

[jmillar]

Equity is only as good as the bank willing to lend on it. Their problem now isn't even how much risk they want to take, but they'll find it very difficult to use the equity without selling. On the other hand, if they'd kept the 4 properties, they would have had more asset exposure.

Yep, they held the properties through a stable market and then sold them just as markets started to rise, against my advice. As you can see, they desperately need some help to protect them from themselves..

My first question would be
1. Why are they retired if they have no income? What was their plan which prompted them to stop work?

At 55 and 64 I would assume they would have to work until they can access their Super or govt pension.

Long story... but the short version... Mum is in a court case against her former employer/business partner and is in the process of setting up a new business. Dad has had cancer and is not fit to work (64 yo). My parents came to Australia with nothing and literally had to fight to stay alive. They are a little 'old school' and have never believed in pensions etc..

This will be hard for a lot of people to comprehend (even myself) but this is just how they are...

Hiya

Google some old threads of Keithj...he had some interesting ideas of "converting" equity into cash.....

Thanks mate, will do.

The fact is, it doesn't sound like they had a plan when they sold the properties. Just a vague 'let's get rid of all the debt, reduce our risk' thing. But that's short sighted when they still need their money to last another 30+ years.

While this doesn't help them at this point, jmillar, you need to understand how lending works: how banks lend, what they lend on, and when they don't.

No, they've never planned.

Alex, among other things, this is something I'm still learning along the way.

It looks as though the only way to create an income is to sell the PPOR so they will have around $1.5M cash, rent a PPOR, spend say $1M on commercial property producing $80k net pa? But if they pay $30k rent then this leaves them with $50k pa (and the $500k cash buffer).

 

[Terry_w]

It looks as though the only way to create an income is to sell the PPOR so they will have around $1.5M cash, rent a PPOR, spend say $1M on commercial property producing $80k net pa? But if they pay $30k rent then this leaves them with $50k pa (and the $500k cash buffer).

Don't be too hasty with this. make sure they get proper advice as the stakes are high.

It may be possible for them to borrow some money too. If not immediately perhaps with some planning it will be possible.

 

[jingo]

Hi jmillar,
Could your parents downsize to a townhouse or apartment in the same area? (Perhaps then spending around $500,000 or so). Then they'd have around 1Mil to invest. Rather than buy one commercial property with the proceeds, it may be best to invest the money in a range of liquid investments including shares, cash and perhaps property trusts. (Research carefully though).
Assuming a 6% return on 1Mil, this would give them approximately $60,000 to live on each year. Although, I haven't allowed for buying and selling costs such as stamp duty, agents fees etc.

 

[sash]

At this stage of their life...I think the financial planner might be right.

If they have a $1.2m home..and $250k in cash. I would look to maximise cashflow. One of them would be able to qualify for the pension.

Some options to investigate are:

1. Downsize to something for say $900k.

2. Use the extra funds and contribute $150k each to super.

3. Remember you can move $450k over 3 years to super...might need to double check this.

Once super is established you dad can access super and still qualify for the pension so long as you mum does not earn too much.

Your mum can do a transition to retirement ...

See advise from a Super specialist who can advise on how to set this up...

Your parents could potentially have a comfortable income of $50-60k.