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W & K

Asset Rich, Cash Poor – A dilemma with solutions

Many elderly people are asset rich, but cash poor. They live off their National Super, and over the years, they will have drawn down on their investments. This then leaves them with what was probably their largest asset, a lifestyle asset, being their home.

Living on very limited means makes paying for rates, insurance, and meeting repair and maintenance costs extremely difficult for them. Of course, this means that expensive trips are simply out of the question.

One means of funding these and other items is to take out a reverse mortgage. This is not something to be done lightly, and other areas of funding should be considered first. In the United States, the youngest partner needs to have attained the age of 62. There are also compulsory counselling sessions.

Despite this, over the years many properties moved into negative equity territory. This was not a problem for the loan originators. As the loans were syndicated, they became investments, often ending up as collaterised debt obligations. These became the problem investments that many people and organisations lost billions of dollars on in the Global Financial Crisis.

Since the Global Financial Crisis, there has been a decline in what were the New Zealand leaders in this boutique lending arena. Most have gone out of business. Relatively recently, one of the smaller banks has made an investment move into this niche business area. Properly advised and managed, this can provide a useful solution for the asset rich, cash poor retiree.

No one should take out a reverse mortgage without being aware of the potential pitfalls. Fortunately, there will be a safeguard whereby if the drawings exceed the property valuation, the property is not put up for mortgagee sale. There is also a lifetime occupancy guarantee meaning “the borrower’s home will always be their home”.

Since bank term deposit interest rates fell from around 7.5% to current levels, those people who were living off their term deposit interest, have had a substantial cut in their income. This is often to a level whereby their standard of living has been seriously eroded. So, whilst they can still be asset rich, they are in fact cash poor.

Their situation can be relatively easily remedied, by adopting an alternative investment strategy, plus a fine tuning of their expenditure. There are investments that will provide a return well more than bank interest rates. Effectively a combination of investment returns and capital drawdowns are used for this long-term strategy. Again, like Reverse Mortgages, qualified advice is recommended and only a portion of one’s investment assets should be invested in such a strategy.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.