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Talking business

by Anthony Haas

 

What financial advisers recommend


Feb 25, 2009

What strategy should a baby boomer couple, with a million dollars equally spread between financial and housing assets, follow?

The current financial crisis is anxious making at least for those in older age brackets.

In writing this column we sought the views of local financial advisors - one of the possible sources of financial advice.

Our sample baby boomer couple has approx. $ 500,000 in housing.

A few weeks ago, the Reserve Bank reduced the Official Cash Rate (OCR) from 5.0% to 3.5%, marking a 4.75% cumulative reduction in the OCR in the past six months.

Spicers Blenheim financial adviser Peter Diack says initially the retired baby boomer couple need to have agreed on their joint attitude and tolerance to risk, the quality of life they wish to lead, and to have quantified their desired level of disposable income in retirement.

This may impact on the capital they are prepared to commit to owning their domestic residence.

“Sound advice would be to not over- commit to how much of their million dollars of assets is tied up in their home, but own something they are comfortable with and that meets their medium term needs. This could potentially free up more capital for investing and assist meet their income desires and requirements” he says.

The short term outlook for property is not good (rising unemployment, higher deposits required by banks for first home owners, student loans) but the most important factor (housing affordability – the amount of tax paid income required to service a mortgage) is still far too high. “Until this statistic returns to historical norms, I suggest investing in a property rental is unlikely to lead to significant capital gains” Mr Diack says.

Quotable Value’s latest housing statistics for Marlborough give an average selling price of $NZ342,371, a decline of 7.3 % over 12 months.

A longer term factor not considered by many is the baby boomer demographic “bubble” all reaching retirement age at a similar time. There are attendant pressures from the ratio of the declining number of people in work supporting the increasing number of those retired and on New Zealand National Superannuation says Mr Diack.

There is also pressure from baby boomers wishing to trade down the larger expensive homes they have all invested in to provide a later boost to their retirement capital. Mr Diack anticipates this is likely to have a negative impact on that section of the market unless immigration fills the gap.

Mr Diack says investors now face an overpriced property market “that has yet to play out”. He anticipates a rising NZ unemployment rate will sap demand for residential housing, offsetting the benefits of falling mortgage rates.

Money Managers Blenheim financial adviser Phil Kennard says the dramatic interest rate decline has been met with joy by those with mortgages, and alarm by many retirees used to living off the returns from their Term Deposits.

Investors living off interest rate returns are in an unenviable position when one considers the effect a high inflation rate (averaging 3.98% over the past year) has on an investor’s ‘real’ returns, not to mention the tax they are required to pay.

Money Managers say most people are considering two options to deal with this reality. Either they learn to get by on less money, or seek out new higher yielding (which are generally higher risk) investments.

A third, “much more appealing option” exists. Money Managers call this option “needs investing” and involves “compartmentalising your assets and investments based on your expected spending needs across a lifetime”.

Mr Kennard says aligning your investment portfolio to your needs begins with a financial plan.

Mr Diack says diversification into well researched investment assets is the key.

These excerpts are from comments by financial advisers in two Blenheim firms, Peter Diack of Spicers and Phil Kennard of Money Managers. Their full articles, and disclaimers, will be accessible at www.decisionmaker.co.nz, and their disclosure statements from their offices.

Talking business found, in researching this column, financial advisers associated with other major financial institutions unwilling to offer potentially useful general financial advice – partly for fear of the compliance costs.

Investors need to be assured that relevant advice will be readily available – and that advice received is based on sound analysis.

Baby boomers – and other general categories of investors, do need, and will need to search for financial advice they can use. Until they are satisfied, search amongst competing sources of advice – and be ready to make your own informed, planned judgement.

Even then, don’t assume investment decisions will all go well for you.

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