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The Simplest Strategy for Retiring Early

The Simplest Strategy for Retiring Early

Getting to a financial position where early retirement is a real possibility is not as difficult as it may seem. There are three key ingredients to being able to retire early; spending less, saving more and starting to invest as soon as possible. What makes early retirement simple is that there is a logical connection between these three ingredients. The less you spend, the more you are able to save and the earlier you can start to invest. But the real magic lies in the fact that the less you spend, the less money you need for retirement. The more modest your standard of living, the sooner you will be able to retire.

An example shows this quite clearly. Let’s assume Peter and Sarah are a couple aged forty. They earn $95,000 after tax between them and they have a mortgage with repayments of $20,000 a year. They can save $15,000 a year which is initially used to pay off their mortgage by the age of fifty. Once mortgage free, they can invest $35,000 a year leaving them $60,000 to live on. By the time they are 65, they will have investments of around $660,000 (at 3% net return); enough to maintain their income in retirement at $60,000 a year, including NZ Superannuation of $30,000 a year.

Now let’s assume Peter and Sarah can save $30,000 year. They are able to pay off their mortgage by the age of 45 after which time they can invest $50,000 a year, leaving them $45,000 to live on.  By the time they are 56, they will have total investments of around $690,000; enough to maintain their income of $45,000 in retirement. By saving more, they have paid off their mortgage much quicker, allowing them to start investing sooner, and to retire earlier. Simple!

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Countdown to Retirement

Countdown to Retirement

The last few years before you stop working are crucial for setting yourself up for a fantastic retirement. They need careful planning to achieve your goals. Of course, with more people now working past the age of 65 it is not always possible to plan towards a specific retirement date. Here are the most important things to do.

  • Plan towards a date after which you will work by choice and if you are able. There is nothing worse than being forced to work late in life by financial necessity. Health problems or lack of employment opportunities may be barriers to work.
  • Adjust your living expenses downwards over the last few years to gradually bring them down to within what you expect your retirement income to be. If you work past your planned date, you can treat the extra income as a bonus to either spend or save.
  • Review your investments to ensure you have liquidity – that is, the ability to get your hands on money when you need it – and to ensure you have put some money aside into growth investments that will keep ahead of inflation and tax over the long term.
  • Review your life insurance cover. By the time you are retired, health insurance and funeral cover are probably the only personal insurance you need.
  • Review your Will and think about preparing Enduring Powers of Attorney so someone else can take care of your affairs later on if required.
  • Get your house in order, literally. Deal with any deferred maintenance on your home and set up a long term schedule of maintenance for the future so you can take this into account in your plans. If you plan to redecorate your house at retirement, remember that it will be need to be done again ten years later!
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An Extraordinary Retirement

An Extraordinary Retirement

Your retirement years should be the best years of your life. With life expectancy increasing, the average person can expect to live to around 90, so retiring at 65 means you will spend over a quarter of your life not working. You can choose for that period of life to be ordinary; or you can choose for it to be extraordinary.

It is said that whatever a child dreams of being when they are about ten years of age reflects their deepest desires for their future adult life and that these desires stay constant in the subconscious mind throughout life, despite the stresses of living. Thinking back to your childhood dreams is a great way to start planning your retirement. Reflect as well on what have been the greatest moments of joy and fulfilment in your life. These may give you clues as to where your future happiness lies. These could include moments of joy in your professional life as well as your personal life. The activities that you absolutely love doing in your personal life are things that you can plan to do more of. Ask yourself these key questions:

  • What is the one most important thing I want to accomplish in this phase of my life?
  • What kind of person do I aspire to be?
  • What do I want to have more of in my life?

There are many people doing extraordinary things in their retirement – setting up philanthropic organisations, developing their talents as artists, musicians or writers, living in another country either as a visitor or a voluntary worker, living a nomadic life in a campervan or on cruise ships, and even giving up on retirement and setting up new businesses or careers. You only get one chance at life, so make the most of it!

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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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