The next step is the biggie

Question

I am a single mother in my mid 50s with all my children becoming (more or less) independent at the end of this year. I have paid off my mortgage and own a house and granny flat debt free. It is worth approx $720,000 and the flat brings in about $10,000 per annum. However I work freelance and as I grow older the work is drying up and the stress it engenders is becoming increasingly hard to take. I realise I am the typical "asset rich, cash poor" baby boomer.

Common sense tells me to sell up and buy a cheap unit and diversify in investments, but a cheap 2 bed unit ( I will still have to accommodate at least one child at a time in University holidays) is still about $320K. How much could I hope to earn off the balance in investments and how do I go about it. I am such a novice I don't know where to start.

Catherine

Answer

Celebrate, you have done very well, not many folk that are successfully single have managed to raise a family and also managed to gather about them assets such as you have, sure you may have started with a settlement from your marriage but you have done well just the same. Just look with pride at your children.

The next step is the biggie, Mid fifty is still very young (53 better be!) and the statistics say if you reach 60 in good health you might have (being female) a further 22 - 25 years ahead, meaning for you around 27 - 30 years to enjoy yourself.

The housing asset has obviously suited well as the family home, the family security, the little help from the rental (you have declared the rental income? - of course you have) and you might have seen a reasonable appreciation in nominal value, just to see how you have really fared adjust the cost price to current market value for inflation and add back, as a deduction, all costs and repairs and maintenance over the years of ownership and the percentage number is more likely to be much like the real fixed interest rate - if more, well done!

Nevertheless, you have a great asset from which to springboard to the next stage of life. Only you will know if you can secure a suitable alternative property for the sum you suggest. Also, I'm unaware of your line of freelance business so I can't make comment on the stress factors or how you might arrange that differently. If you can do as you say you are left with around $400,000 to invest.

New Zealand Superannuation is still 10 years away, so don't hold you breath on that one. With the current property relationship laws you also need to be careful with your assets, you rely heavily upon them for future income - be sure they are safe, take some advice.

Seems like you are on your own doesn't it? It need not feel that way but the options you face from an investment viewpoint are huge. You have had some experience in the residential rental area. However, having flat onsite and owning several or a couple of rentals is like chalk and cheese - very different. We are free from bias on how folk should grow their wealth or earn an income from their assets however we strongly suggest you need to be professional in whatever approach you take. Far too many folk just do not actively manage their affairs.

My suggestion is a little boring really. Seek out a good financial planner (not an insurance adviser or investment adviser but a financial planner) by asking around, pretty standard stuff really, however where I differ is - do not be afraid to dig really deeply to get somebody good.

A few pointers to help in the selection;

  1. Check out the office and staff, go visit and trust your tummy feeling, professionals look and act professionally all the time.
  2. Ask to speak to three or four current clients of more than 10 years standing.
  3. Ask to look at the reporting processes and understand what they are saying.
  4. Get a clear understanding of who owns the company, speak to them as well.
  5. Only work with somebody who can prove they invest their own funds just like they are suggesting you do.
  6. If they are inflexible or make you feel like a number in their system instead of a very special relationship, move on.
  7. Be prepared to pay well for great service, but be sure you know what you are paying and make sure the bulk of what you pay is not just related to the size of your portfolio..

When you settle that first step I suggest you keep it really simple to begin, maybe even stay in high quality cash deposits or rated, direct fixed interest type investments (with high liquidity) until you get familiar with the adviser, the terminology and just what they are talking about. You could adopt this approach for a year or two in our current economic climate and still not really affect the longer term 10 - 20 year outcome in any negative way.

If you grow trust you will be open to invest in more sophisticated and potentially (I emphasise potentially) higher returning investment opportunities in future. But in the mean time you will have been achieving a reasonable return. By reasonable I suggest that your $400,000 portfolio should return something around $32,000 to $33,000 (8.00 - 8.25%) per annum gross of tax in todays environment. You should not pay more than 21.5% marginal tax on your income (assuming you do not earn more than $38,000 in total) so stay well away from any investment that pays higher tax than that.

Take it just one step at a time as you have time on your side. I must be slow - but just a last minute thought - maybe we could help?

 

Original Article published July 2005

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