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Health Insurance for Retirees

Health Insurance for Retirees

Health insurance is a popular product, with around 30% of the population having cover, often through a workplace scheme. However, there is a high cancellation rate amongst retirees due to the big increase in premiums as you get older. After paying premiums for some years, often without a claim, is it wise to cancel health insurance just at the age when you are most likely to need it? Premiums are higher in old age for good reason – there is a high probability of claim. Without insurance, you will be reliant on the public health system, which may mean going on a waiting list for health care. Insurance is a means by which we pass financial risk onto someone else. As with all insurance cover, there are three questions to ask.

  1. What are the risks? You may have a known existing health condition which is likely to get worse or lead to other problems. There may be a family history of certain medical conditions.
  2. What are the consequences of those risks? There may be loss of enjoyment of life resulting from non-urgent conditions that put you on a long waiting list. If you are still working you may also suffer loss of income through illness.
  3. How much risk are you willing to accept? If you have significant financial assets, it may be possible for you to cover private health care costs yourself without affecting your standard of living. Alternatively, you might choose to have an excess on your policy so you share the risk with your insurer and pay a lower premium.

There are many retirees with low incomes for whom health insurance is simply not affordable. Their best strategy is to live a healthy, active lifestyle and keep savings on hand for unexpected health care costs.

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Money for Retirement

Money for Retirement

Calculating how much money you will need in retirement is no easy task. With life expectancies around 90, there is a period of 20 to 30 years to plan for.  A simple planning framework can help get around some of the uncertainties to make it easier to work out how much money you will need.

There are three types of outgoings you need to plan for:

Money for daily living expenses. These are expenses that occur on a regular basis and predictable, such as food, petrol, rates, insurance, power, phone, clothing etc. NZ Superannuation (around $30,000 for couples and $20,000 for singles) will barely cover these costs but will not usually be enough to cover additional accommodation costs such as rent or a mortgage. Additional income from part time work or investments will give you a better standard of living.

Lump sum expenses. These are larger expenses which occur infrequently such as the purchase of a new car, an overseas trip, home maintenance and renovations, and large medical or dental bills. The easiest way to plan ahead for these is to break your expected retirement timeframe into shorter periods of say ten years. Generally, the first ten years is when you are likely to be more active and wanting to travel. The second ten years is the time when home maintenance is likely to be required, while the final ten years is when you need to consider what kind of aged care you may need – such as moving to a retirement village or paying someone to look after you. Typically, lump sum spending decreases over time.

Bequests. If you would like to leave a sum of money for family or for a charitable purpose, set these funds aside at the beginning of your retirement in a long term investment portfolio.

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Your Pre-Retirement Checklist

Your Pre-Retirement Checklist

Retirement is not what it used to be. There are many options for making the transition from full time work to being fully retired, ranging from early retirement to late retirement or a gradual shift through working part-time or choosing a less stressful job. Along with all these choices comes the dilemma of when and how to retire. It can be a nervous time because it is not always easy to get back into the workforce once you have left. So before you take the big leap, here are some things to consider:

  • What kind of retirement do you want and how much will it cost? Do a budget for weekly living expenses and big one-off expenses like travel and replacing your car.
  • Consider what your income will be, taking into account NZ Superannuation, other pensions, other Government benefits and any part-time work.
  • Calculate how big your retirement nest egg will need to be to finance your retirement lifestyle. There is a good retirement calculator at sorted.org.nz.
  • Review your current financial situation. Have you paid off all debt? Do you have a well thought through investment strategy that will enable you to achieve your retirement goals? Do you have some cash on hand as well as longer term investments? Have your insurance policies been reviewed?
  • Do a ‘dry run’. Try living for a few months on what your retirement income will be and see how it feels. Not only will this allow you to see how tolerable your retirement lifestyle will be; it will also allow you to save a bit more.
  • Do your financial housekeeping. Make sure your Will is up to date, set up Enduring Powers of Attorney and ensure all your important financial records are stored tidily and safely.

Now you are ready to make your choice!

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Living on NZ Super

Living on NZ Super

New Zealand is finally catching up with the rest of the world and considering changing the age of eligibility for NZ Superannuation from 65 to 67. However, the four-year process to make this transition doesn’t start for another twenty years. In the interim, the number of pensioners is burgeoning and life expectancy is increasing.

When the old age pension was first introduced it was intended to allow people to enjoy a few short years of rest before the end of life. That was in the days when people didn’t often live past their 70’s. NZ Superannuation is set at 65% of the national average wage. That’s enough to cover usual weekly expenses, but not enough to allow money to be saved to replace a car, maintain a house or enjoy overseas holidays. While it is possible to live from week to week on a low income for a few years, increased life expectancy means that retirees now face spending perhaps 30 years or so on a meagre income. During that time, there are many unexpected or unavoidable expenses which cause huge financial stress.

Statistics show that around 40% of pensioners rely solely on NZ Superannuation for their retirement income, and for a further 20%, NZ Superannuation makes up 80% of their income. The prospect of living on such a low income for a long time is a daunting one. For those pensioners who are lucky enough to have a retirement nest egg, investment returns are low. The combination of low pensions, low rates of investment return and increased longevity means that the elderly are facing an increasing probability of living in poverty in the final years of life. It is no surprise that 40% of people aged 65 to 68, and 20% of people aged 70 to 74, are still working.

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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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