Home' Trinidad and Tobago Guardian : November 23rd 2014 Contents NOVEMBER 23 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Glen and wife Jasmine retired
a month ago and are very
happy to catch up on some
much needed rest and relax-
ation. They have been
dreaming of taking two
cruises that could cost up to $80,000. Their
combined monthly pensions after tax (including
their $3,000 NIS pensions) is $15,000. After
doing a rough budget they could comfortably
live on $10,000 per month. They both received
tax-free cash lump sums from their pensions
that were used to clear their mortgage and
They have $25,000 left in the bank and they
plan to use this only for emergencies. They
are not extremely comfortable with this modest
amount and are considering disposing a parcel
of land they bought 20 years ago for $80,000;
the value today is $3,000,000.
Jasmine s younger brother Lucas is encour-
aging them not to sell because the property
is on the fringe of a rapidly developing area.
He suggested they obtain approvals to subdivide
into building lots and construct some town-
houses. Glen sees the wisdom in his advice
but simply does not have the energy or money
pull off such a project.
Both Glen and Jasmine are in excellent health
and come from families with long life expectan-
cies. Their main concern is their current finan-
cial position and the impact of inflation on
their standard of living. They want to know
if it is a good idea to sell the property and if
so when, they also want to know what to do
with the cash after the sale.
Nick's Assessment & Advice
Balancing money and life
Glen and Jasmine want to enjoy the fruits
of their labour with the least amount of stress.
This doesn t mean they are cavalier in their
approach and treatment of money; they would
simply like to strike the perfect balance between
a comfortable standard of living today and
financial stability in the future.
Despite the fact they are cash poor they
have a healthy net worth. The question is:
how do they extract the cash they need from
the only major asset they own and still reap
the long-term benefits from their investment.
Lucas has an excellent idea but as Glen indi-
cated it does not fit well with his current
finances and energy levels.
Goals, needs and strategies
Before any decision can be made we must
first consider the couple s goals and needs.
They are to:
1. Keep enough cash for short-term needs
such as emergencies.
2. Have money to pay for the cruises.
3. Deal with the impact of inflation on their
standard of living.
We first need to quantify these goals then
devise a financial strategy to accomplish them.
Currently they have less than two months
of their monthly income in a savings account.
Probably if they had (what the financial experts
recommend) six months income or $90,000;
they might feel a bit more secure. Whilst this
money can come from the sale of the property,
it can also be built up over time from their
surplus monthly cash flow of $5,000. If this
amount is saved they can fill the shortfall of
$65,000 in 13 months.
Glen estimated that the cruises would cost
$80,000. A similar approach can be applied
whereby they can save and then spend. So
assuming each cruise costs $40,000 they
would be able to make the first trip eight
months after they accumulated their emergency
money. Of course, depending on how desper-
ately they desire to pack their bags they can
approach a financial institution for an unse-
cured loan or a line of credit to pay for the
trip. This means they would have to sacrifice
part of the surplus money to service the loan.
It will then push forward the emergency fund
target date depending on the level of the loan
Impact of inflation
Cost of living is dependent on income and
based on recent history it is not farfetched to
expect that prices could double in a decade.
What this means is that someone living on a
fixed income of $15,000 will see a $7,500 (50
per cent) loss of value in 10 years time.
In Glen and Jasmine s case the value of the
$5,000 surplus they currently enjoy may be
completely eroded in less than seven years
and, by the time they turn 70, they might be
in a deficit in real terms.
To counteract this loss they will need to
supplement their income. It is not uncommon
to find retired individuals dipping into cash
reserves to make ends meet. If done for a long
enough time this can wipe out their savings.
The better approach would be to spend only
the returns on investments leaving the principal
The problem is most financial assets (includ-
ing bank accounts, money market funds and
credit union accounts) cannot keep pace with
inflation. If the couple decides to sell the
investment property and deposit the cash in
the bank, their real net worth will fall over
Keep or sell?
Real estate is one of the few asset classes
that provide a good hedge against inflation.
Whilst the investment property will increase
in value, it does not produce extra income and
this is what Glen and Janine will need in 7-
10 years time. To do this they will have to
erect a structure, which will require a sub-
stantial capital injection that they absolutely
do not have. They could attempt to save and
build in phases but rising construction costs
may make this very difficult.
Acquiring capital using mortgage financing
is an option (if they could qualify) but this
would have been a better option when they
were age 45 or 50. Of course, this all assumes
that Glen is willing to deal with the stress that
comes with managing a construction project.
All things considered it may be a better idea
for the couple to sell the land and purchase
another property that is ready to rent. At
today s prices they may be able to find a unit
that could adequately meet their income needs
with a price tag between $1,500,000 and
$2,000,000. The remaining cash from the
sale and subsequent purchase could be placed
in bank deposits, credit unions and mutual
funds. Deposit Insurance does not cover the
When to sell
The couple should also take Lucas obser-
vation into account if they decide to sell.
Under normal circumstances their property
value would increase at a gradual pace with
other properties in the country, however, with
the aggressive development in close proximity,
they could see a dramatic escalation in their
value over a short period of time.
Glen and Jasmine have a at least five years
before their financial situation becomes
unfavourable. During this time they may be
able to extract much more value out of their
investment before trading up.
(Details were modified to protect client's
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can
be contacted at:
Balancing money and life
PHOTO: ROBERTO CODALLO
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