Dear Qualified Financial Advisor,
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My partner and I are in our mid-40s, and after a few decades of the corporate life, we’re hoping to retire by the age of 60 and spend our time travelling together. We have planned diligently to save up enough and have some passive income to keep our cashflows going post-retirement. But one thing we haven’t considered is buying a home, because we don’t have children and will not be leaving it to anyone. We’ve always lived in rented houses because it was convenient and turned out cheaper, and we didn’t want to deal with the hassle of paying off a home loan. Now, we’re wondering if it’s a good idea to buy property — on one hand, it would significantly reduce our expenses after retirement; on the other, it would mean pulling out money for the down payment from our retirement fund and possibly retiring later than planned, to be able to pay off the loan completely. We’re a bit confused, and open to any suggestions.
Yours,
A Lifelong Tenant
Dear Lifelong Tenant,
While living out of a rented house is not a bad option, generally speaking, having a house of your own when you retire is considered the ideal scenario, simply because you would want to spend the rest of your retired life peacefully without going through any hassles of shifting between rentals. However, you can weigh out the pros and cons and make a choice that best suits your needs.
A quick way to make a decision would be to compare the rental and purchase costs of the property you’re interested in. If the rent you would pay is lower than your EMI payments for a home loan, it’s better to rent and save the extra funds, and invest them to build wealth. Also, check if the location is convenient with regard to daily work and travel.
Still, since you said that you have enough savings, buying a house and funding the down payment with your savings is an option you can explore, especially since you have approximately 15 years of working life left. If the ratio of down payment versus loan amount can be managed, accommodated, and budgeted for carefully, then this is a viable option for a real-estate investment.
However, there are a few things you need to look at before you decide on buying a home.
Budget for a Big Spend
Keep tabs on your current monthly cashflows and identify areas where you can save money and set it aside, without sacrificing your current lifestyle.
Be Disciplined with Savings
It’s great that you’re diligent when it comes to saving, but do try and structure it by creating a goal, setting aside funds for the down payment of your house and investing systematically to meet the goal, if you intend to buy the house in a few years. Once the goal is set, you will have a fair sense of if and when you will be comfortable buying a house.
Know Where You Want to Retire
Decide where you will spend your post-retirement life. If it’s not in the city, and would be at a place closer to nature, then the prices for a home there will be lower as compared to those in a tier 1 city. This allows you to slowly work towards buying and building the place you will call home. In the interim, you may reside in a rented apartment, which is a better alternative than buying in this case.
Look Out for a Good Deal
Keep your eyes and ears open, and spread the word around. You never know — you may get an opportunity that works for both you and the seller, like a distress sale. But do set funds aside every month so you have the down payment ready when it’s needed.
Set Up a Retirement Fund
Since you have close to 15 years until you retire, you can invest in instruments that have a higher rate of return than the interest rate on your home loan. This will help create wealth and in turn beat inflation, as the value of your investments compounds over a period of time. This could also cover the interest you will be paying on the EMI for your house.
These are the basic steps you could take, based on what you shared. Hope this helps you make an informed choice.
Good luck,
Neeraj Bahal
1 Finance Advisory Committee for Qualified Financial Advisors — Mumbai Chapter
