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.
2 June 2015
15 July 2013
Investing in property is a popular means of building wealth for retirement. Typically, keen property investors will build a portfolio of properties using borrowed funds in the expectation that the increase in value of the properties over time will allow them to sell off one or two at retirement leaving a portfolio of properties with no debt. The rental income from the properties, less expenses such as rates, insurance and maintenance, then produces an income for retirement.
While this all sounds good in theory, there are a number of factors which make property a less than ideal source of retirement income.
Many people live for twenty or even thirty years in retirement. Investment property held over that period of time usually requires expensive maintenance such as painting, roof repairs and replacement of floor coverings. Financial pressure can result unless provision has been made for these expenses. Income from property is not constant, as there are often periods between tenants when the property is vacant and occasionally tenants do not pay or cause damage to the property. Being a landlord, even if you hire a property manager, is not fun if you are in poor health or in your late retirement. As well as the hassles of dealing with tenants and maintenance, there is also the need to keep records of all income and expenses and to prepare an annual tax return.
Perhaps the most compelling disadvantage of investing in property in retirement is that although it produces an income, it is difficult to access your retirement capital. Unless you have a desire to leave a large inheritance for the beneficiaries of your estate, it may be better to sell your property and invest in liquid assets that can be gradually spent for your enjoyment over the course of your retirement.
25 June 2012
A KiwiSaver milestone will be reached in July this year, five years after KiwiSaver was first introduced. When a KiwiSaver member reaches the official age of retirement (currently 65) and has been in the fund for a minimum of five years they can choose to withdraw their funds or leave them invested in KiwiSaver.
When you have access to your KiwiSaver funds, your provider or adviser should let you know what your options are. These should include:
- Leaving your funds invested until you need them
- Continuing to make contributions to your fund
- Making a full withdrawal
- Setting up a regular withdrawal from your fund
- Making lump sum withdrawals from time to time as your need funds
If funds are left in KiwiSaver, you will no longer receive a Government tax credit and your employer will not be obliged to make a contribution. KiwiSaver providers offer a range of different funds, including conservative, balanced and aggressive funds. Conservative funds are more heavily invested in fixed interest and aggressive funds are more heavily invested in shares while balanced funds are somewhere in between. Your investment can be switched at no cost from one type of fund to another. You should ensure that your chosen fund is appropriate for your financial situation.
Your decision about what to do with your funds will depend on a number of different factors, including:
- Whether you need income from your investments
- The amount and nature of other investments you have.
- Your attitude towards risk and return
- Your time frame for investing
It will be interesting indeed to see how eligible members respond in July to suddenly having access to their funds, which in some cases could be substantial. The more sensible will obtain professional advice before making decisions.
31 August 2010
The word ‘retirement’ conjures up a range of confusing or even contradictory feelings for people these days. Once upon a time, retirement was a defined day, usually marked by a birthday, after which any form of paid employment ceased immediately. A combination of factors, including the end of compulsory retirement and increased longevity, mean that people are now working well past the age of eligibility for their pension. For some, this means just continuing on with their career as it was, either full time or part time, but an increasing number are seeing retirement as an opportunity to do something completely different in life. What better time in life to experiment, with a modest standard of living guaranteed by pension income, no mortgage payments and no dependent children to worry about?
There are many famous examples of people who have started businesses late in life, including Ray Croc, founder of McDonalds and Colonel Sanders, founder of KFC who had both celebrated their 65th birthdays before they created their global empires. For some, the motivation to try something new is driven by the desire to have a higher income in retirement, while for others, it is all about the excitement of trying new things; perhaps things they have always secretly wanted to do.
There is a great little book called ‘Don’t Just Retire: Reformat’ written for such people by Dr Lynda Falkenstein (Niche Press, 2005), full of ideas for how to reinvent yourself in retirement. Lynda suggests three important questions to ask yourself: If you could, with a wave of a wand, be doing anything you want, what would it be? What is it that gives you the greatest personal joy and fulfillment? What are you doing to ensure ‘it’ is an enduring feature of the rest of your life?