This week, the London Times carried a story claiming that a retiree, aged 102, received a 25-year mortgage. However, there is little realistic chance of repayment. He will have to live until 127 before he makes the final payment. According to the article, this guy is a property investor who has taken out an interest-only £200,000 mortgage. He plans to meet the £958 monthly repayments with income from rent.
The broker who arranged this deal - Jonathan Moore, of Mortgages for Business said. “Obviously there is an element of risk if property prices and rental income suddenly fall but there is no sign of that at the moment.” What about the risk that this investor dies in the next six months? More generally,it is hard to see how this 102-year-old man understood what he was signing.
The story generated a response from a UK group representing retirees. Gordon Lishman, the director-general of Age Concern, said: “It’s crucial that people think about the long-term implications.” When you are over 100 years old, next week is long term.
The UK housing market – it is absolutely insane.
Many Americans are depending on their home for security in their retirement. But how well has real estate performed as a long term savings vehicle? As a recent Fidelity Research Institute Report points out, historically, real estate returns have been rather poor.
The Fidelity researchers examined long term real returns going back all the way to 1835. They then calculated the average returns over 5, 10, 20 and 30 years. They found that real estate performs worse than stocks, bonds and treasury bills. In fact, real estate closely tracks the real income growth. As such, if property prices are growing faster than income growth, it is a sure bet that property is overvalued.
If real estate offers such poor returns, then why is there is misconception that it is such a good investment? There are a couple of reasons for the real estate super-returns myth. First, people often just look at capital gains and largely ignore other real estate related costs; for example taxes, repairs and maintenance. Second, people often under-estimate the interest costs of long term debt; a 30 year loan does involve a lot of interest payments. Finally, people often confuse real and nominal growth. Six percent annual capital gains might seem like a healthy return, but if inflation is growing at 5 percent, then it is obviously a lot less impressive.
Certainly, during the last five years, returns were higher than historical averages. However, prices are now definitely heading south. If you haven't sold and started renting, stop counting up the retirement resources embedded in the value of your home. Insofar as that equity windfall existed, it is about to slip away.
Sit back, relax and think about where you would like to be when you are sixty five. Spend five long minutes pondering the joy of retirement. Joy? Wake up. There is nothing joyful about growing old. It is hard, often lonely and painful.
Old people have only one reliable friend - money. The more you have, the easier life will be. So, now ask yourself this much more important question - how much wealth will you have accumulated for retirement?
Oh, so you are depending on the capital gains from your house. Think that one through for a moment. Lots of other people are doing the same thing. So when you are trying to cash in those sweet capital gains, many people will be dumping their house onto the market. Housing is a very unlikely retirement fund. Besides, you will have to live somewhere. Moreover, moving house as an elderly person sounds way too stressful.
Are you saving? No? So how are you going to live once you stop working? Social security, you say. Again, far too many people are depending on that clapped out retirement plan. Social security is going broke; everyone knows this and so do you. In ten years time, it will be gone.
So what is the answer? The 20-60-20 rule. It is very simple; you should be spending no more than 20 percent of your income on housing costs, 60 percent should be used for current non-housing expenditure, and 20 percent should be saved. And no, that 20 percent is not your estimate of the capital gain on your house. It is net income, put aside every month and placed into a savings account.
If you save for long enough, you might, just might have enough put away to make the grim reality of old age a litte more palatable.
Remember - 20-60-20.
On Thursday, the Commerce Department published the grim reality. People are sustaining their unwarranted lifestyles by eating into their wealth. In 2006, the savings rate was minus 1 percent. Moreover, the dismal 2006 savings rate exceeded the negative savings rate recorded in 2005, when people spent 0.4 percent more than they earned. Statisticians have to go back to 1933 to find a lower savings rate. The savings rate has been negative for an entire year only four times in history -- in 2005 and 2006 and in 1933 and 1932. Now, does that sound like something that can continue indefinitely?
Hey! You've won a ride back to the top
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