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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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Migrating Pensioners

MigratingMigrating Pensioners

There is an interesting trend developing amongst retirees; they are increasingly on the move internationally, not only for holidays but to live overseas permanently or for extended periods. Better health and increased longevity for retirees are factors in this trend, as well as the desire to be close to children and grandchildren living overseas. This raises the issue of mobility of pensions, and it is a remarkably complex one. Your eligibility for a pension while overseas depends on how long you will be away and where you are going. There is generally no problem if you are intending to be away from New Zealand for six months or less, although it is a good idea to let Work and Income know you will be away. If you are planning on travelling for more than six months but with the intention of returning to New Zealand, you will need to make an application to receive your pension while you are away. If you have lived in New Zealand continuously between the ages of 20 and 65, you should receive the full amount of your pension and for lesser periods you will be paid a proportionate amount. For those intending to live overseas, arrangements will depend on where you are going. New Zealand has Social Security Agreements with several countries under which people moving between those countries are entitled to benefits and pensions. For example, if you go to Australia you will be able to receive New Zealand Superannuation for six months and during that time you will need to apply for an Australian Age Pension. This pension is income and asset tested and you may therefore receive less than the rate for NZ Superannuation. Because of the complexity, it pays to do your homework before you set off on your travels.

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The Three Bucket Approach to Retirement

Three BucketsThe Three Bucket Approach to Retirement

How best to get income from investments in retirement is a problem that has many possible solutions. The return on an investment portfolio is a combination of income (interest or dividends) and capital gain (the increase in the value of the investments over time). The disadvantage of income-producing investments is that the income is taxable and in general they offer little or no capital gain and a low return. The disadvantage of growth investments, which offer capital gain and higher returns over the long term, is volatility, and to get cash you may have to sell investments at a time when their value is down. Running down investment capital is another issue. Some investors wish to leave a sizeable inheritance while others don’t; some are wary of running down capital in the early stages in case large sums are required later. The three bucket approach to portfolio planning is a simple solution to these problems. Divide your expected retirement into three periods; the first five years, the next ten years beyond that, and your final years. Estimate your beginning retirement capital and how much you want to have left at the end in today’s dollars. Next, decide much you want to use up in each of the three periods. These are your three buckets of money. Plan to invest the first bucket (for the first five years) in term deposits or bonds and to use up both the income and capital over that period. The third bucket, including final capital, will remain untouched for around fifteen years and can be invested in growth assets. The second bucket can be invested in a combination of income and growth assets which will be converted to income assets only when the first bucket is used up. This is a simple yet effective approach.

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Guilt-free Retirement Planning

guilt-free-zoneGuilt-free Retirement Planning

Many books on retirement planning suggest you start thinking about planning your retirement when you start your first job. While it is true that the sooner you put plans in place for the long term the better off you will be, it is unrealistic and impractical to start planning too soon. Let’s face it, when you are a twenty-something, your priorities are to find your way in life and have a good time. For most people of this age, that means doing nothing more about retirement planning than joining KiwiSaver. Later in life, priorities shift to buying a house, paying off the mortgage and ensuring children get the best possible start in life. There is no need to feel guilty during these stages about not saving more for retirement than what you are contributing to KiwiSaver. The priority should be to get rid of all debt in as short a time as possible so as to have enough years left before retirement to build up your savings. If you can do this by around the age of fifty you still have a good fifteen years, which is a long enough time frame to invest in volatile, high return investments. Five years out from retirement is when you need to really accelerate your retirement planning. Start by setting your retirement goals, focussing first on how you wish to spend your time and then quantifying how much money you will need to achieve your goals. Work out a retirement budget for your everyday costs and a budget for one-off costs such as travel, home maintenance and replacement of your car. Aim to live on your everyday retirement budget for at least five years before you retire to give you time to adjust to a lower level of spending while maximising your savings.

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Advice for Elderly Parents

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There comes a time when our elderly parents, who we thought were capable of doing anything and everything, need our help to manage their affairs. As we get older, it becomes harder for our brains to process information. Filling out forms becomes a nightmare, and understanding directions or instructions is very confusing, especially if they are in writing. The signs of inability to cope include piles of mail that haven’t been attended to, confusion about whether bills have been paid or not, inability to recall where money is invested and how much is invested and in some cases giving money away inappropriately.

Simplicity is the key to managing financial affairs late in life. Keep bank accounts to a minimum and make arrangements for bills to be paid by direct debit or automatic payment. It is a good idea to help older people with sorting out their paperwork, deciding what to keep and what to throw out, making sure that important correspondence is dealt with in a timely manner and ensuring that vital documents such as wills and insurance policies are up-to-date and stored safely.

Conversations about living arrangements are important as many retirement villages now have lengthy waiting lists, so it pays to think ahead. While they are still healthy, find out what your parents preferences are for care in the event that their health deteriorates. Enduring powers of attorney, which come into effect with loss of mental capacity, can be prepared by a lawyer to enable you to take care of financial affairs and personal welfare for your parents when the time comes.

The aged should be treated with dignity, respect and tact. There is a balancing act between allowing them do as much as they can while they are able and stepping in to help avoid a financial crisis.

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Plan Ahead for Retirement Living

retirement carePlan Ahead for Retirement Living

It is said that the older you get, the faster time goes, and if you subscribe to that view, the best time to think about where you would like to spend the last part of your life is sooner rather than later. Later in life, the effects of aging make it harder to analyse complex information and to make sudden changes in lifestyle. Family members sometimes step in to either provide support or take control, or alternatively, health events can bring about forced change. It is not always possible to foresee how things will be in the future, so it is a case of being well prepared for a range of different possibilities.  A comprehensive list of options and related information for retirement living in your area can be found here.

If you are thinking of moving into a retirement village, it pays to do your homework first. There is an excellent checklist of things to consider on the Sorted website. The Ministry of Business, Innovation and Employment has an informative brochure called ‘Thinking of Living in a Retirement Village’ which is available here.

Support at home can include someone to come to your home, respite care and day care in a residential facility. There is funding available for this from the Ministry of Health and a brochure can be obtained here  or from Work and Income.

Options for residential care such as rest homes, dementia facilities and hospitals, will depend on your health status and current vacancies at the time you require the accommodation so it is difficult to plan ahead for this type of care. It is important however, to know what facilities are available and to be able to compare this with support that is available in your own home.

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Compulsory Retirement Savings

retirement savingsCompulsory Retirement Savings

There has been much talk recently about whether KiwiSaver should be made compulsory and the percentage contribution increased. In theory, there could be several economic benefits from this approach. As a result, millions of dollars would be saved rather than spent and this would help take the heat out of the economy and reduce inflationary pressures. The money saved would be invested in bonds and shares, providing funding for business investment and economic growth. Over time, the amounts saved could potentially allow NZ Superannuation payments to be reduced or the age of entitlement increased, thus easing the financial burden on the Government as the population ages. It is difficult to argue against compulsory retirement savings from an economic point of view.

Looking at the issue from the point of view of an individual provides a very different perspective. By definition, around half the working population earns less than the average wage and in addition there is a large segment of people who are not working or who receive a Government benefit. The reality for many of these people on low incomes is that the best financial outcome they can hope for by the time they retire is to have no debt. Compulsory saving for such people would place them under significant financial pressure.

While the remainder of the working population may be in a position to save with better management of their income, many still have a mortgage. From a strictly financial perspective, it makes more sense to pay off a mortgage faster than to save for retirement as this provides a better return. If the problem to be solved is one of encouraging people to cut back on spending, the best solution is increased financial literacy and to give people the tools they need to better manage their money.

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