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A Wake-up Call for Retirement

A Wake-up Call for Retirement

New Zealand must wake up to the fact that our aging population means NZ Superannuation will become increasingly unaffordable. The number of people over the age of 65 will double in the next thirty years and the net annual cost of NZ Superannuation will triple over the next twenty years from $11 billion to $36 billion. The Commission for Financial Capability has recently released the recommendations from its 2016 review of retirement income policies. Retirement Commissioner Diane Maxwell is now calling for the age of eligibility for NZ Superannuation to be increased to 67 by 2034, and for the age of access to KiwiSaver funds to be decoupled from NZ Superannuation.

New Zealand is lagging behind other countries in making changes to retirement age. Australia, the UK, and many European countries have taken steps to improve the financial sustainability of their pension schemes, most commonly by raising the retirement age. John Key refused to discuss the possibility of making changes while he was in office. That obstacle is no longer there and we need to start the debate.

The Commission is also recommending a number of changes to KiwiSaver, to make this a more effective vehicle for retirement saving. These include increasing the minimum contribution from 3% to 4%, allowing people to make contributions at a higher percentage than currently, and allowing people over the age of 65 to join.

To help fund NZ Superannuation, the Commission recommends that Government resume contributions to the NZ Superannuation Fund. Presently, new migrants are eligible for NZ Superannuation after 10 years, and the Commission recommends increasing this to 25 years. As well, the Commission recommends removing the option for non-qualifying partners of superannuitants to also receive a pension.

The bottom line is we all need to take more responsibility for our own retirement.

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Pension or Lump Sum?

pension-or-lump-sumPension or Lump Sum?

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement. Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two. A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is “Should I take a pension or a lump sum?”

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life. This helps take away the uncertainty of how long you are going to live and what investment returns will be. If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns). The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited. To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy – based on your health and family history of longevity – and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

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Get Ahead Before You Retire

get-aheadGet Ahead Before You Retire

The last five years or so before retirement are some of the most important in your life. Your choices between spending and saving in those few years will determine the quality of your retirement. The wealth you have accumulated at the time of your last day of paid employment will determine your financial future for the rest of your life – which could be around thirty years.

In these last few years, it is really important to decide how you wish to spend your retirement and therefore how much money you will need. Then you will need to calculate how much you will need to save each year to reach your target level of retirement savings.

The transition from a high level of income to a low level of income after retirement is not an easy one. It is always a lot easier to find ways to spend extra money than it is to find ways to spend less! As you approach retirement, try and adjust your spending to fit what your retirement income will be. You will need to make allowances for any work-related spending, such as transport. The benefits of doing this are:

  1. You will be able to test how realistic your retirement budget is before you give up your job
  2. You will be able to adjust gradually over a period of time to your new income instead of going ‘cold turkey’ from a high level to a low level of income
  3. You will be able to save even more for your retirement.

Finally, check the balance between the value of your home and the value of your investment portfolio. If your house represents more than 70% of your total wealth, you may be in danger of being asset rich but cash poor in retirement.

 

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Top Tips for Your Fifties

FiftyTop Tips for Your Fifties

Whether you plan to keep working after becoming eligible for NZ Superannuation or not, 65 still looms as the defining age for retirement, and it looms even larger in your fifties. Depending on your circumstances, the prospect of reaching 65 can lead to feelings of joy, fear or uncertainty. The ten years before retirement are like the last lap of a marathon race. If you are leading, you could easily trip and fall before the finish line. If you are at the back of the pack, it is still possible to have a surge of energy for a respectable finish.

Power up your savings

How much you save during the last few years of your working life will determine how well you live in the twenty or thirty years of your retirement. Work towards living on whatever your retirement income will be and save the rest.

Blitz your debt

Crunch your remaining mortgage by having part of it floating or as a line of credit, so you can make extra payments without penalty. Put your credit card on ice and use a debit card instead.

Slash your outgoings

If you have no dependents and a good asset base you may be able to cut back on your life insurance. Shop around for the best deals on utilities.

Boost your investments

It’s a myth that all your investments need to become more conservative as you get closer to retirement. Match your investments with the time frame in which you will need to access your capital; conservative for short term, growth for medium and long term.

Plan your dream retirement

The amount of money you need will depend on how you want to spend your retirement. Be clear on your retirement goals so you have a financial goal to make your dream real.

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Elder Abuse

Elder AbuseElder Abuse

Our population is aging and incidents of elder abuse are increasing in line with this trend. Elder abuse is a serious issue in New Zealand, and Age Concern report that they receive around 2000 referrals a year, with the most common types being financial, physical and emotional. For every referral, there are, no doubt, many more cases which go unreported.

Financial abuse of the elderly can take many forms. At the lower, but still unacceptable, end of the scale, is pressure put on elderly parents by their children or others with regard to their financial affairs. In some cases, children may put pressure on parents not to use up their savings in order to preserve the children’s inheritance. Such pressure could see the elderly being persuaded not to move into a rest home or retirement village, not to take overseas trips or buy a new car, and not to borrow funds for living costs through home equity release. Alternatively, children or others, such as caregivers or friends, may pressure the elderly to give them money or possessions. Loans may not be paid back, or the elderly may be co-erced into providing security or guarantees for loans. Elderly parents can sometimes be forced to accommodate, with no payment, children with financial problems or grandchildren whose parents cannot care for them. This can cause significant financial hardship. At the higher end of the abuse scale, there can be misuse of powers of attorney to take money or straight out theft of money or possessions.

Elder abuse is not OK. We all have a duty to watch for signs of it and take action if necessary. This may include contacting other family members or caregivers, referring the matter to a community organisation such as Age Concern, consulting a solicitor, or contacting the police.

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Annuities for Retirement Income

Retirement IncomeAnnuities for Retirement Income

Retirement is something to look forward to – a new way of being, and lots of new experiences ahead. However, there is one big concern, and that is making sure there is enough money to provide a comfortable lifestyle until the end of life. Accumulating money in KiwiSaver or superannuation scheme is straightforward; it’s just a matter of setting up a regular payment into the scheme where it is managed. Once the funds become available on reaching retirement, the big question is what to do with them.

In simple terms, most retirees want an ongoing income that is higher than NZ Superannuation and access to occasional lump sums for big one-off expenses such as buying a new car or travelling overseas. One solution for this is to have an investment portfolio which comprises an annuity to provide ongoing income and a lump sum invested in liquid assets which can be sold to release additional funds. An annuity is a contractual financial product which converts a lump sum into a series of regular payments for life. The payments made are a combination of investment return and repayment of investment capital. Old style annuities have no residual value on death and do not allow withdrawal of lump sums over and above the regular payments however there are new products which offer residual value and withdrawals.

Unfortunately, annuities have limited availability in New Zealand. Members of the now closed Government Superannuation Scheme and certain company superannuation schemes may have the option of taking some or all of their funds as an annuity. Late last year a new annuity product called Lifetime Income Fund was launched with the aim of making annuities a more widely available option for retired investors. The key advantage of annuities is certainty of income – something which most retirees desire.

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Living on NZ Superannuation

Retired CoupleLiving on NZ Superannuation

There is an avalanche of baby boomers who are retiring. The burning question for most of them is “How can I live on NZ Superannuation?” A couple who both qualify for NZ Superannuation receive around $576 a week after tax. That’s just under $30,000 a year. For people on an average or above average income, it is a significant drop.

Research released last year by the Commission for Financial Capability gives some clues. A survey of people aged 50 and over showed that most retirees have at least some savings and investments. Of those surveyed, only 28% said they had enough money to do all the things they wanted to do in retirement. Those without savings and investments were significantly more likely to be struggling to make ends meet. The conclusion is that NZ Superannuation is not enough to provide the kind of retirement most people want.

Everybody’s retirement expectations are different. Happiness in retirement comes when expectations can be met by available financial resources. The lower your resources, the lower your expectations will need to be in order to be happy. This might mean living in a cheaper house, moving to a small town where living costs are lower, finding pleasure from spending time with family and friends rather than expensive possessions or overseas travel, taking up hobbies that don’t incur big costs, and becoming more self-sufficient with food and energy. It is possible to live a happy but frugal life.

If you would rather increase your resources than lower your expectations, your options include continuing to work (perhaps part time), sharing your home with others, selling all or part of your house to family members, borrowing from family, or taking out a home equity loan. A happy retirement is all about cutting your coat according to your cloth.

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Overcome Your Retirement Fears

Overcome FearOvercome Your Retirement Fears

It’s not easy going back to work after an enjoyable holiday. Rather than returning to the same old drudgery, many people consider a fresh start by thinking about applying for a new job or contemplating retirement. Dreaming about a different life and making it happen are two different things. While some people embrace change and are good at bringing it about, others are more cautious or even fearful, despite their desire to make changes.

Retirement is something to look forward to rather than to be feared. Financial concerns are the main driver of fear and are often based on uncertainty and lack of information. Overcoming fear is a matter of addressing the unknowns, determining whether you are on track to be able to afford to retire and making any changes needed to get on track.

Start by determining your desired weekly retirement income. New Zealand Superannuation should (barely) cover the basics, so add on to that what you would like to spend each week on the ‘nice to haves’ such as going out for dinner or buying nice clothes. Turn this into an annual amount and add on an amount per year to cover big one-off expenses such as travel, replacing whiteware and vehicles and maintaining your house. Use a retirement calculator (there is a good one at sorted.org.nz) to work out how much money you will need to have invested to make up the annual shortfall and how much you will need to add to your savings to get to this amount. Make sure your KiwiSaver is invested in an appropriate fund and consider setting up a separate, unlocked retirement savings fund to supplement your KiwiSaver fund. Review your current budget to ensure you have the right balance between enjoying life now and saving to enjoy life in retirement

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Tough Times Ahead for Retirees

toughTough Times Ahead for Retirees

One of the key determinants of term deposit rates is the Official Cash Rate (OCR), which is the principal monetary policy tool used by the Reserve Bank to maintain price stability. Reducing the OCR has a stimulatory effect on the economy, as borrowers take advantage of lower rates to spend more. Eventually the increased demand for goods and services leads to higher inflation. While the focus of the Reserve Bank’s current policy of reducing the OCR is on borrowers, the flip side is that investors are also affected. When interest rates are high, investors are happy and borrowers suffer. Conversely, low interest rates lead to grumpy investors and delighted borrowers.

Of course the good news is that while interest rates are low, inflation is at a historical low of less than 1%. Looking ahead, it is clear that the Reserve Bank is intent on keeping interest rates low, resulting in a stimulus to the economy that will see inflation increasing over the next two years or so to around 2%. This is bad news indeed for retirees who are reliant on interest income. The result could be investment returns of less than 1% after tax and inflation. Retired investors should review their strategies and consider alternatives to term deposits. They should be prepared to let go of the notion that their retirement capital must be left untouched and that their income is restricted to investment returns. The key financial challenge for retirement is to run down capital in a planned fashion. A conservative approach is to plan to live for a long time to avoid the worst case scenario of running out of money before the end of life.

These are difficult times for risk-averse investors and careful planning will be required to deal with the tough times ahead.

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Prepare to Retire

Happy RetirementPrepare to Retire

A quarter of those in retirement say they don’t have the money to do the things they want. Another quarter say they have enough to do everything they want and the rest, around a half, are able to do only some of what they want. These are the grim findings of a recent survey of people over the age of 50 done as a joint project by the Financial Markets Authority and the Commission for Financial Capability.

Nearly half of those nearing retirement don’t have a financial plan for their retirement and only a quarter have thought deeply about the sort of retirement lifestyle they want. A minority of people have calculated their desired income and required expenditure and how much they need to save to top up their income from NZ Superannuation.

Key factors that get overlooked are housing costs and the impact of health on retirement.  Changes in health status can lead to additional medical costs as well as impacting on the ability to work and be active. Around 20% of people are likely to be paying rent or a mortgage in retirement and yet only a few of these people have considered what these costs might be and how they will find the income to cover them.

Of concern also is the conservative approach to investment in the over 50 age group, with bank deposits and residential property being the investments of choice. Only a quarter of those surveyed planned to invest in shares or managed funds. There was a high correlation between those who had more thoroughly planned for their retirement and those who were prepared to invest in medium and high risk investments.

There is no excuse for lack of preparation. Do your retirement plan through the Commission’s Sorted website and/or see a financial adviser.

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