Sunday, October 15, 2006

Newsletter October 2006

Thought for the day

Eliminate the word “retirement” from your vocabulary.

Replace it with “renaissance”.

Retire means to retreat. Renaissance means new birth.

Doesn't "renaissance" better describe your post-career life?

Don’t pay off your home – just yet.

From time to time, evidence emerges that forces us to change long held beliefs and to question established dogma.

Climate change is one current example; a more famous illustration would be when Copernicus found that the earth revolved around the sun, and challenged the church’s teachings.

Now I think that I have found another – it is dogma that we have to pay off our home, right? Well, perhaps in the new environment when we’re going to live 15-20-25 years in retirement, we should examine this belief in some detail.

What was correct for our grandparents is not reality today. They retired at age 60 or 65, and died when they were 70 or 75.

But today we are going to live well into our 80s.

Our grandparents did not need to invest to ensure that they had a dignified retirement. They were dead before they ever needed to face the costs of medical procedures, and they never dreamt of travelling the world in their retirement.

But it’s all so different for you and me today.

Now I’ve done some calculations recently and I have come to the conclusion that the mortgage on your family home should also be on an interest-only basis.

In essence, what I now realise is that when we are repaying both principal and interest on the family home, we are just accepting dogma. We have been doing it without ever asking why should it be so?

And when you think about it – wouldn’t the amount that you are paying off the principal of your mortgage be better used to pay the interest-only loan on an investment property?

Let’s run some numbers.

On the assumption that property (including your family home) is moving up along the long term trend line at a modest 5% pa, and it’s worth today say $400,000, then it would be increasing in value $20,000 pa.

Now if you have an investment property worth say $300,000 then the annual increase in value would of course be $15,000.

On your family home, I have assumed that you still have a mortgage of $180,000 @ 7% and you are paying $1,395 per month, principal and interest. Now you could refinance this to an interest only loan, which would cost $1,050 per month.

That differential of $345 per month could be used towards financing an interest-only mortgage on the investment.

The contribution required by you to hold your investment might actually be say $600 per month, but now that you have found $345 by financial engineering, your (additional) out-of-pocket is only $255 per month i.e. $64 per week.

If you can find an additional $64 per week, i.e. $3,328 pa, your return is $15,000 each year!

Are you sure you are making the correct financial decision if you are paying off the mortgage on your family home?

Which outcome would you prefer?

Let yourself accumulate wealth through your property investments: then you’ll have enough to pay off your home when you retire (that $180,000 mortgage won’t have much value in 15-20 years) and you’ll still have adequate for a dignified retirement.

Two work colleagues

Con Sumer (pronounced “consumer”) and Juan Toinvest (“waaning to invest”) worked together for some years, and the only difference was their attitude to money.

Con used to spend everything he earned, but Juan used to pay $125 per week into a succession of investment properties.

So when they were retrenched, Con was devastated.

Juan, however, was wondering if he actually needed to find another job.

Are you in the “consumer” or the “wanting to invest” family?

They set the border between SA and WA in 1494.

The border between South Australia and Western Australia was established in 1494 by Treaty of Tordesillas.

The background is that in 1492 Columbus discovered North America with the immediate consequence being a war between Spain and Portugal to gain ownership of the wealth of New World.

So in 1494, the Pope was called in to referee the truce – and his solution was to offer half of the world to Spain, and the other half to Portugal.

Basically he ran a dividing line north-south through South America – which is why today they speak Portuguese in Brazil and Spanish throughout the rest of the continent.

And the Pope continued with this line up over the North Pole and then down the other side – and so established the border between South Australia and Western Australia. In 1494.

That demarcation lasted for centuries – in 1776 Captain Philip arrived in Botany Bay with orders to colonise “Spanish Australia” and Captain Stirling arrived in the Swan River in 1829 to take control of “Portuguese Australia”.

That line is still there – to the north of Australia and slightly west you’ll have memories of Portuguese Timor and Portuguese Macau. And to the right of that line you’ll find the Philippines – where Spanish is still the national language.

Until next time

Bernard Kelly 0414 778 518

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