30 November 2017

Will you have enough for your retirement?

We all know we’re meant to plan for our retirement, but according to well-known financial commentator and adviser Liz Koh, many of us are completely unprepared. 

“The need for people to start planning is massive. I’m inundated with enquiries from baby boomers who really haven’t got a clue how they’re going to fund their retirement.

They’ve had very different experiences to the previous generation - redundancies, divorce, business failures – these are things that hardly existed in their parents’ era.

As a result, there are a lot of people reaching retirement now with very little money, or much worse, debt. Those who can will need to keep working but in the long term it’s possible they may not be able to afford to keep living in their own homes.”

Liz says we need to start facing up to some big questions. She calls them the three ‘uncertainties of retirement’.

They are:

1) How long will I live?

2) What will my investment returns be?

3) How much money will I need?

 Big questions yes, but not impossible to answer.

Well-known financial commentator and adviser, Liz Koh

Well-known financial commentator and adviser, Liz Koh

1) How long will I live?

According to research by the New Zealand Society of Actuaries, the life expectancy of a woman who turned 65 in 2015 is 89. While men still die at an earlier age than women, the gap is closing. 

And don’t forget life expectancy is an average age at death. This means that around half of all people are going to live beyond 90. Which means that some of us could be living 30 years or more in retirement! 

So if you’re relatively fit and healthy now, you best plan for a long game. You should also consider the longevity of other family members – that might give you some more specific clues.

2) What will my investment returns be?

Liz says the conventional wisdom that you should be really conservative with your money in retirement is now a “load of nonsense”.

“By the time you take off tax and inflation your bank deposit investment will be worth very little in terms of purchasing power by the time you need it. Investment returns are presently low and are likely to stay that way for some time.

But if you’re prepared to invest outside the bank you can get 2-3 times the return. If you want to make your money last you really need to invest in growth assets (property and shares) or annuities like Lifetime Retirement Income, which guarantee you a fixed fortnightly income for life.”

Liz also says retirees need to match their investment strategy with their investment time frame.

Invest money you don’t need for a long time with a long term investment strategy. Meanwhile start running down your investment capital to provide yourself with an income. After all, if you don’t spend your money, your kids certainly will.

You really need to ask yourself, who do I want to spend my money and when do I want it to be spent? Me, my kids, or a charity? Now, in 5 years, in 10 years or in 20 years?”

She says one of the biggest problems she sees is people under-spending their money.

“After spending your whole lifetime building up your retirement savings, it can be hard to flick the switch when you retire and watch it slip away. But remember that money has no value until you spend it. There are a lot of people who instead of tackling the uncertainties, just keep worrying and do nothing.”

Then there are others who can’t stop spending. 

“If you’re on a combined income of 150k after tax and then retire and suddenly go to living on 30-40k a year it’s going to come as a big shock. If you start cutting down the spending before you retire, it’s a much easier transition. It will also allow you to save more money before you retire.”

Many of us are living longer in retirement

Many of us are living longer in retirement

3) How much money will I need?

“This is where you need to do some top down planning”, says Liz.

Firstly, break your retirement down into periods of time and then figure out exactly what it is you want to do at each stage.

Liz suggests 3:

1) Live It Up stage. This is the early part where you might buy a new house and car, join the golf club, go out for dinners and shows and perhaps travel the world. It’s also the time where you’re probably going to be the most active so make the most of it. Set yourself a time limit and a budget and have fun! 

2) Fix It Up stage. This is about 10 years in and the stage that is sometimes neglected in people’s plans. That new car you bought in the Live it Up stage now needs replacing and the ‘new house’ needs repainting. The body is also starting to slow down and may need some attention. So make sure you’ve allowed for these possibilities in your planning.

3) Winding Down stage. Do you want to move into a retirement village or would you prefer to stay at home and pay for someone to care for you and your property when you’re no longer able to? Get an idea of costs and decide what you want to do.

How much money you need is going to depend on what you want out of each stage. Liz says you need to think carefully, work it out, and make your plan sooner rather than later.

If you have a plan, you’re going to get far more out of your retirement. Basically, you can’t plan enough.”

The 'live it up' stage when you first retire is generally when you are most active

The 'live it up' stage when you first retire is generally when you are most active

Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.

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