Well done, the world is your oyster!

Question

I paid my mortgage off early in October 2004. I am 54 years old on a good salary, no debts, car, phone and petrol paid by my employer. My question is the money I would have used for my mortgage payments is accumulating and just sitting in the bank, where should I direct it.

Thanks Brian.

Answer

Well done, the world is your oyster! Having reached the first goal of most folk there is a big temptation to ‘have a cup of tea’ as the saying goes.

However, this is only the beginning, the choices available to you are extensive. Your comments suggest your employment position is happy and stable and you are able to dedicate some time to planning your future.

At 54 you will still feel very young (all 54 year olds will agree I’m sure) but the reality is if employed (as apposed to self employed) you have around 11 years, or at best up to 16, of top income production years ahead to make good your retirement or freedom plans as I like to call them.

A good rule of thumb is that if a couple aims to have a freedom fund of 12 times their current household income they will be at least financially secure to live on for another 20 or 30 years. This factor includes any ‘top-up’ you might receive from New Zealand super. If you do not both qualify for NZ Super when freedom day arrives make that 15 times salary – scary isn’t it?

Your choice comes down to personal preference; you can do the long boring slog of saving weekly, fortnightly or monthly - reaching a sum that looks halfway decent and then transferring that from a savings account to a bank term deposit or even bonus bonds - heaven forbid! (see previous column)

Or, you can take a planned approach, maximising the use of your new-found free cashflow and use all the financial benefits of compounding interest, leverage (borrowing) and pure growth assets to speed up your asset accumulation. Borrowing to invest, if managed correctly will give you some taxation benefits as well.

Start by doing a tight budget to see what you really need to live on, not leaving lazy cash around, get it earning straight away using a higher paying call account for ready cash. Get the rest working longer term and don’t go for 90 day stuff, why would you do that? Look for a decent return - after all you do not need the funds for a good few years so select an investment that reflects that horizon.

If you elect to consider the leverage style of investment progress, and I strongly recommend you do, talk to somebody that really understands and is preferably independent of the ‘offeror’ of the opportunity. I really like commercial property but watch out for those highly leveraged, depreciation maximised, residential property deals – they promise the world with a picket fence but I can see many tears ahead in those arrangements.

A further word of caution; understand the risks you are running; it is a fallacy that higher rates always equal higher risk, and as always watch out for hidden fees, be prepared to pay a fair price but keep careful watch, not sure? Ask somebody with a good reputation – not your neighbour.

Original Article published May 2005