Retirement planning is a topic that threatens to send many people to sleep. But when you look at retirement as a potential two or three decade period at the end of your life, where you will have total freedom to do whatever you like within reason, it seems ridiculous to just leave it to fate.
Stopping full time work permanently may seem like such a distant dot on the horizon – there’s always something on, mortgages to pay, children to rear and then get through university – but life may be slightly dull – the state pension may not keep you in the habit to which you are accustomed.
A single person has $277 a week to live on and a couple has $426 a week – not much left over for holidays.”The whole idea about retirement planning is to develop enough other assets that in the future can generate a regular income [rent, dividends, interest] that will replace your work income,” says Spicers Wealth Management senior financial adviser Jeff Matthews.
Goal setting in writing
Ideally you should start retirement planning in your 20s, but most twentysomethings have other things on their mind. Not many in their 30s give it much mind space either but by the time your 40th birthday comes around, it should be a “real wake-up call”, says author of Twenty Good Summers and wealth coach Martin Hawes.
The first step all financial advisers will ask you to take is to set out some goals.
Do you want to retire when you are 65 and go and live on a Greek island or do you want to work part time between 60 and 70, then sell the family home and take up painting in the Bay of Plenty?
Write down whatever these goals are – you have a much better chance of them happening that way, says Hawes.Then, comes the hard part, you need to crunch the numbers – how much do you think you will need to live on in 20 years time?
You can either go to the excellent Sorted.org.nz for an inflation adjusted calculator or, if you feel you need the reassurance of an expert, go and see a financial adviser. They do this for people every day. All the experts agree that to eradicate debt is the first piece of action after the goalsetting plan. “Pay off the mortgage – you can’t earn anything more in another investment that is risk free and it’s tax efficient,” says Susanna Stuart, financial adviser at Stuart + Carlyon.
Start as you mean to go on
It’s what you do at the beginning of your working life that matters, says Spicers’ Jeff Matthews. He recently met up with some well-off Americans visiting Auckland on a cruise ship who were all patently enjoying their retirement in some luxury. They all had one thing in common – they had been putting money away their whole working lives into various pensions, military, corporate pension funds etc. In some cases they had several pensions on the go. On top of this they had investment portfolios with the spare cash they had after they had paid their mortgages off.
“It was a three or four-legged approach rather than a one-legged approach,” says Matthews.You can always justify why you can’t set up a pension, he says. “People pay rent, mortgage, gym membership, coffee everyday but never put money aside – there’s hardly any money left so why should they bother?”It’s a mindset of getting people to pay themselves first,” he says.
Changing trends in retirement
If you are 65, and you are a woman, your life expectancy is 85. As John Nelson, co- author of What Colour is Your Parachute: For Retirement says, you may easily live more years than it took you to get through school.
People are living for longer, and need income producing savings.Retiring cold turkey is perceived as too big a change for people to cope with and unnecessary.
It is better to discuss a phased retirement with your employer so you get used to having some free time. Employers are becoming far more amenable to employing people in their later years and value older staff’s expert knowledge.
People are working for longer in many cases because they want to.The introduction of the voluntary work-based savings initiative KiwiSaver, with tax incentives is something which the Government hopes will help people be better prepared for retirement.
A good idea before you leave fulltime employment, is to have a house maintenance expert in who can tell you what costs to your house you will have to pay in the next 10 years. It might be a new roof or a deck needs replacing. You don’t want any nasty surprises when there is no salary coming in any more. It’s also wise to buy some near new appliances which will last you well into retirement.
A lot of people also invest in a late model car. A lot of people downsize from larger family homes to smaller apartments or units. It does depend on what the property market is doing. One of the best ideas at the moment if you are retired, is to rent and put the proceeds from your house into an income producing savings account.”Renting at the moment is the bargain of the century. You get such a big capital asset for such a small amount of money,” says Martin Hawes.
Home Equity Release
Babyboomers are moving into retirement age, and this SKI (Spend the Kids Inheritance) generation is going to grow. By 2021 the over-50s market will grow by 27 per cent, according to advertising network Senioragency. They have worked hard and they intend to enjoy themselves. They figure they have lavished everything on their children growing up from braces, to holidays to tertiary education.
One of the new financial products the SKI generation are more than happy to factor into their lives later on, is Home Equity Release. Home equity release finance allows asset-rich, cash-poor to pay for big items.
According to the Consumers’ Institute, a “reverse” mortgage is just that – a mortgage where you don’t make payments until the end of the mortgage period(which is usually when you sell your home or move out). The mortgage is secured against your home and you remain the legal owner until you sell. Interest and fees are added, so the loan balance increases.
Cautious financial advisers tell their clients to use Home Equity Release as a last resort, certainly not to go round the world in their early 60s with it but wait until later.”The longer you can leave it the better,” agrees Hawes. But as we are only here once, you’d better get on with it.
5:00AM Friday March 14, 2008
By Gill South