Providing for retirement and buying a home

A Fin24 user wants to know how he could possibly provide for his retirement and buy a home for the first time. He writes:

I am a member of a provident fund. I have been a member for the past 18 years and am still a member.

I am really in need of serious financial advice, please.

I am 44 years old and married with two children - one is 16 years old and one is 7 years of age. My wife is a housewife.

I have been working for the company for the past 18 years and am still in its service.

I did not make provision for retirement yet, but I have been a member of the company's provident fund for the past 18 years.

I am in the process of buying a house at the moment, but have not made a final decision about it yet.

Could you advise whether it would be wise to buy a home for the first time at this late stage and what should I do if I want to provide for retirement and still want to buy a home?

I am not considering leaving my current employment. All I want to know is what will be the best way forward for me and my family, taking into account that I want to buy a home and still want to begin with providing for retirement.

Matthew Chapman of NFB Financial Services responds:

Any guidance on this subject will require more information from your side, such as your retirement income goals, the current value of your provident fund, your monthly disposable income available to put towards a property or retirement savings and your current living situation - that is rental expense.

Without this information it’s very difficult to provide any specific assistance.

Just as an opening note to clear up any misconceptions, your provident fund is a means of retirement saving and being a member for the past 18 years would have resulted in some form of retirement provisions, which would be dependent on the contributions and level of risk taken.
 
What you need to look at is the pros and cons of owning a property, a couple of which are listed below:
 
Pros

- Capital ownership and appreciation

You will be able to benefit from the growth in the value of the property over time.

Renting is entirely an expense and at the end of a rental period you do not have an asset to show for it.

- Control

You will have effective control over the property, allowing you to make any renovations or adjustments as you see fit.

Often when renting, you are bound to the landlords restrictions and conditions.
 
- Leverage

Taking a home loan on the property allows you to purchase a home you would not ordinarily be able to afford.

Renting is effectively paying off someone else’s bond, allowing them to benefit from any capital appreciation.
 
- Less exposure to interest rate and inflation

Once you own the property outright you will be less exposed to changes in the interest rate and inflation, which will adjust your rental payments.

In retirement, one is vulnerable to such factors as rising expenses can quickly erode a capital base.

Cons

- Added expenses

What’s often overlooked when renting is the added costs of owning a house over and above the bond repayments, such as insurance, maintenance, levies, rates and taxes.
 
- Long-term commitment

Taking out a home loan results in a serious financial commitment, as defaulting on repayments may result in the repossession of the property and a severe financial loss.

Rental agreements are usually much shorter in nature and therefore less stringent.

In general
 
As every case is different, you should sit down with a professional financial planner to ascertain your financial position with regards to your retirement plan, as well as create an income and expense analysis.

This will allow you to calculate whether you can afford to purchase a property whilst still maintaining the correct provisions for your retirement.
 
One observation that can be made is that due to your age, you do still have a long term horizon in which to pay off a bond, which is typically termed at 20 years.

This, however, must be taken in the context of your full financial plan, as you do not want to have insufficient retirement savings and be forced to work well into your old age.

- Fin24

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