“Asset rich, but cash poor” – it is a problem that many face in retirement. But exactly what does it mean?
Assets are wealth that you own, whereas cash is money that can be spent without selling anything first. The last part of that definition is crucial and the reason why many people suffer a decrease in their standard of living when moving into retirement. An asset such as a home, business, or even investment involves a sale transaction before the wealth can be spent.
Since the 1990s, house prices in the UK have increased massively, resulting in a situation where 67% of personal wealth is now tied into their residential property. A great problem to have, but what happens when you need to access this money?
For many retirees, selling their home, downsizing, and releasing equity is a significant part of their retirement strategy. However, sentimentality is a powerful force, and parting with the family home can often be too big a price to pay.
One alternative is equity release or life-time mortgages, which allow people to stay in their homes and release capital whilst alive. In exchange, a company takes ownership over the home on death and sells it to repay the loan. However, equity release is rarely a good trade – sometimes paying as little as 60p for every £1 of equity – the price of keeping your home is not cheap.
Timing is also a major factor – exactly when is a good time to sell? It is often that when you NEED to sell assets, it is the least good time to do so. If you bought your home in 2008, then the chances are that you would not have broken even until at least October 2014. That is over half a decade in the red!
The same can be said for pensions, ISAs, or other investment vehicles earmarked for retirement. No one wants to be buying high and selling low to access their hard-earned cash, but with interest rates on cash deposits at historic lows what is the alternative?
Having a balanced portfolio, split between fixed assets, longer-term investments, as well as more liquid investments and cash, is the ideal solution for most people. Balancing your portfolio between cash and assets is difficult, especially when considering the opportunity cost of holding cash in a world of near 0% interest rates.
At Foresight, we are great advocates of cashflow modelling in the run up to retirement. Our specialist software projects your situation 20-30 years into the future and is crucial in anticipating future cash shortfalls. This allows us to build a financial plan that highlights the right time to sell large, illiquid assets such as homes or businesses without having to settle for a sub-optimum sale price.
It also comes down to the skill of your Wealth Strategist in working with you to decide what your cashflow is going to look like in future years. The Quantum Programme has been designed to make this as painless and simple as possible.
If you would like to talk about your retirement strategies then please contact us, and one of our Wealth Strategists would be pleased to speak with you to work out your own individual course of action.