Your Retirement or Your Mortgage?

Back when we launched The Money for Life Letter (an investment service designed to help ordinary Aussies plan for retirement), two news stories hit the press.

The first was about British retirees turning to gambling to pay off their debts.

People across the UK found themselves without a job, but with an enormous mortgage and houses worth less than the loan against them. In a last ditch effort, they turned to the national lottery to try and salvage their finances.

Imagine gambling on the lottery just to pay off your mortgage.

As you can probably guess, it doesn’t work out well most of the time. But even if it did work, people who won the lottery are left with very little after settling their debts with the bank. That makes you realise just how crazy all this property speculation really is. Even winning the lottery might only set you free from the bank’s grasp.

But the second news story was even more frightening…

According to an article in the Guardian, elderly Japanese are turning to petty crime to pay for their daily expenses. Deflation, demographics and low interest rates have taken their toll over twenty years. They left a huge proportion of Japanese society broke. Now retirees shoplift for basic necessities and a cheap thrill.

But it’s when they get caught that things get surreal. The Guardian explains what you might see in a typical Japanese prison:

‘Pills and porridge: prisons in crisis as struggling pensioners turn to crime.

‘Charts on their cell doors stipulate special dietary requirements and medication regimes. A handrail runs the length of the corridor, and makeshift wheelchair ramps are kept at the entrance to the communal baths.

‘But the most common condition afflicting these men is loneliness. Some serve their sentences without seeing a single visitor. Their relatives are either dead, live too far away or, unable to cope with the shame of having a criminal in their midst, have ceased all contact.

‘The rise of the superannuated criminal is only partly explained by Japan’s rapidly ageing population. While the number of Japanese aged 60 and over grew by 17% between 2000 and 2006, the number of prisoners in the same age bracket soared by 87%.

‘The prisoners repay their debt by performing six hours a day of light manual labour, two less than Onomichi’s younger prisoners. Every few minutes, one of the men lays down his tools and shuffles to a makeshift pharmacy set up in the corner of the room, where the prison doctor dispenses pills that must be washed down on the spot with tiny cups of water.

‘As many as 80% of the inmates here have high blood pressure or diabetes. There is a portable mattress on hand in case anyone feels faint, along with a wheelchair and, placed discreetly behind a desk, boxes of incontinence pads.’

All this must seem very distant from you and your retirement plans. But the first cracks in Australia’s retirement system are already appearing. And we haven’t even had a crisis yet.

Choosing Between Your Retirement and Your Mortgage

Imagine you tipped the Gold Coast Titans to beat the Canberra Raiders by more than 30 points last week. Your betting account is up several thousand dollars as a result. Being a responsible person, and acknowledging the Titans’ prospects for the rest of the season, you decide to do something more constructive with the money.

If you had to choose between saving for retirement and paying off your mortgage, which would you choose?

It’s an incredibly tough question to answer. There are all sorts of factors. Theoretically, the correct answer has something to do with what you do with your retirement savings.

If you invest in shares that go up 10%, and your mortgage costs you 7%, you would be better off investing. But that’s a very crude analysis. It’s not like you know how well your investment will do. And there are all sorts of tax implications, not to mention your bank’s rules on paying down your mortgage early.

It turns out Australia’s retirement system guardians are already panicking about this issue. Not gambling, but the idea that people will get the decision between their mortgage and retirement savings wrong.

Never mind choosing whether to pay off the mortgage or boost your retirement savings. CPA Australia (an accounting group) has issued a warning that Australian retirees are prone to using their retirement savings to pay off their enormous debts when they retire.

Channel 7 did a story on CPA Australia’s report. Here’s an excerpt of the transcript to give you an idea of how sensationalist their claims are:

Presenter: ‘A peak accounting body has expressed concerns about the future of Australia’s retirement funding system…a warning that the system could collapse if retirees are given too much freedom in how much money they spend.’

Alex Malley, CPA Australia: ‘The consequences are catastrophic for Australia if we don’t get the process of Superannuation right.’

Presenter: ‘Accountants say our taste for bigger and better homes and lavish retirement living has long term consequences.’

Alex Malley, CPA Australia ‘When people retire, they’re going to take that lump of…superannuation and they’re going to extinguish the debt. Which will mean they have no income and they’ll need to go on the pension.’

The solution is supposedly to limit the lump sum payment you can take out on the day you retire. We can’t have you deciding what to do with your money, can we?

It’s remarkable that Australians are still in so much debt when they retire that this is such a big concern. Again, that shows you the costs of abnormally high house prices.

But the accounting body’s argument doesn’t make much sense. They say you should stay invested to secure an income. But if the mortgage chews up that income, it’s not much good. You might be better off using your savings to pay off the loan, if that saves you from paying more interest.

For example, if you’re getting $1500 dollars a month in income from your retirement investments, but your mortgage costs you $1600, then the loss of income from investments is only half the story. You also lose an expense by selling out of your retirement investments and paying off the debt. Owning your home outright has its own non-financial benefits too.

Of course the better option is not to get into that position in the first place. That’s why it pays to plan ahead long before you retire.

Balancing your mortgage and retirement savings is one of the most delicate issues of retirement. There are a bundle of ‘outside the box’ solutions which we’ve featured in The Money for Life Letter.

One of the most controversial involves a way to extinguish a mortgage while still keeping your home. Just so you know, not everyone with a mortgage will be in a position to do this. It’s all got to do with Australia’s very own sub-prime debt crisis. But unlike in America, Australian borrowers fought back and won.

What nobody has realised just yet is that, in Australia, it isn’t just sub-prime type debt that’s caught up in the scandal. Normal mortgages can have the same crucial fault that has allowed borrowers to cancel their debts.

But how do you know if you qualify to cancel your debt?

Well, only those borrowers who bother to make three phone calls and examine some paperwork will ever know whether they really need to pay ‘that bill’ every month. Instead, they might be able to live mortgage free, own their home, and have the income from their retirement investments.

You can find out just how you might be able to cancel your mortgage any day now. Keep an eye out for the video presentation and special report.

Nick Hubble
Editor, The Money for Life Letter

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From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Markets and Money: Drama in Europe’s Economy: Savers ‘Suffer for Cyprus’

Money Morning: Get Used to This Stock Market Action, It’s Set to Last…

Pursuit of Happiness: Where Cyprus Got the Idea for its Savings Raid

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Nick Hubble is a feature Editor of The Daily Reckoning Australia . Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter.

If you're already a subscriber to these publications, or want to follow Nick's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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