4 April 2017
The Retirement Panel
Bernard Hickey, Liz Koh, and Ralph Stewart answer your questions.
Bernard has been an economist and financial journalist for 25 years. He has worked for Reuters, the Financial Times, and Fairfax Media.
Liz is an economist, financial adviser, and author who specialises in common sense financial advice. She is the author of popular financial advice book, 'Your Money Personality'.
Ralph was previously CEO of AXA Insurance and the ACC. At AXA, Ralph set up one of the first KiwiSaver schemes in New Zealand and has since established Lifetime Retirement Income to help New Zealanders transition from saving to spending in retirement.
At the recent Lifetime Retirement Seminars you talked about how interest rates could stay lower for longer. Could you please remind me why this is expected to be the case?
There will always be factors that influence interest rates in the short term, such as exchange rates, inflation, credit etc. However, as an economist I try to focus on longer term trends. Research from The Bank of England looks at how interest rates have behaved over long periods of time.
The research shows that over hundreds of years, interest rates have been on average around 3%. While in recent decades interest rates have been higher, it appears we are returning to a long-run average and rates are likely to stay low for the foreseeable future.
This graph here (also from the Bank of England) shows how global real interest rates have been falling for over three decades. They averaged 5% in the 1980s and 4% in the 1990s. So far this century, they have averaged 2%. Currently, they are around zero or slightly negative.
If you're interested you can read the full report here.
I understand you have a simple process for managing retirement savings using buckets of money. Could you explain further please?
Yes, I use common old garden buckets to illustrate how to manage your money through retirement.
Retirement can last 30 years so I like to break up retirement into 3 common stages or "buckets":
1) Live it up - This is the first stage of retirement where you have your health and want to spend money doing things you enjoy, like travelling or buying a new car.
2) Fix it up - This is the stage about 10 years into retirement when you need money to fix up your house, car, and perhaps even your body!
3) Wind it down - This is the final stage of your retirement where you need money for healthcare and potentially some in-home assistance.
When you set out in retirement I advise clients to divide up their money and put some in each of the above 3 buckets. Because you don't need your "Wind it down" money until later in your retirement you can invest this into growth assets. Likewise, because you want your "Live it up" money earlier, it's better to put this into liquid cash assets.
These 3 buckets are designed to help you manage your discretionary spending. I also advise client to have capital invested in addition to this to help them cover week to week expenses. NZ Super and Lifetime are designed to help people achieve this with a regular income for life.
Liz Koh is an Authorised Financial Adviser. 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.
How does Lifetime manage to pay me a fixed level of income for life when you don’t know how long I will live?
We do this in two ways.
Firstly, we invest your savings in a balanced fund. Every year we credit your account with your investment returns. From this account we also pay you a regular fortnightly income for life. Some years your investment returns will be higher than your income payments, in other years your investment returns may be lower than your income payments. In these years we use your capital to make up the difference.
Secondly, we insure you regular income so if your capital is depleted we draw on this insurance to continue paying your fortnightly income for life. Your savings less withdrawals plus net investment returns are always available to you and will be paid to your estate if you pass away.
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