When South Africas baby boomers who entered the job market in the 1960s and early 1970s go on retirement (as many are now doing), their financial advisers will almost always tell them to use whatever pension fund, insurance or golden handshake money is paid to them to reduce or eliminate debts - including outstanding sums owed on their mortgage bonds.
This thinking, says Rob Lawrence, National General Manager of the bond originators, Rawson Finance, makes good sense when financing depreciating assets such as motor cars and electronic goods (which are very often bought on extremely high interest rates), but it may well not be valid on an appreciating asset with a relatively low interest rate, such as a home.
'The financial consultant will argue that now that the retiree is on a reduced income, he should cut back on his monthly savings. However, these days, given that only 6% of retirees can actually afford to retire comfortably, the retiree will as often as not find that he wants to, or has to, continue working, at least part-time '“ and he will do this.
'Supposing, therefore, that he had a bond of R1 million on which, say, R200,000 is still owing. If he continues to service this debt from the monthly income he derives from his part-time work and invests whatever lump sums have become available to him in inflation-beating assets such as good shares or perhaps an investment property, five to ten years from now he is likely to find (a) that he has paid off his house and (b) he has seen his lump sum investment increase significantly in value, probably doubling every five years. At the same time he will have seen his home increase in value by at least some 7% per annum'
(The 7% figure on the home, Lawrence predicts, should be accurate because he does not foresee the current stagnation in house prices lasting beyond 2012.)
This way of looking at the finances of a retirees situation, says Lawrence, gains further credence when it is realised that although the official inflation rate is running at 4,2%, the rate affecting middle class people paying for food, petrol, electricity, medical insurance and possibly the education of their children will probably be closer to 9% in the coming year.
This economic scenario, says Lawrence, helps to explain why the USA is apparently not over-worried about its US$14 trillion debt.
'They will let the value of their currency depreciate. This in effect will reduce their debt by whatever percentage the dollar has depreciated, making the value of the money they owe significantly lower than it was when the money was borrowed initially'
South Africas rand, says Lawrence, is also likely to depreciate in the coming years, making inflation-beating investments such as a home a very good choice as a hedge against a continually devaluing currency.
For further information contact Rob Lawrence on 021 658 7100 or email rob@rawsonfinance.co.za.
