Tag Archives | Retirement

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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Plan for a Healthy Retirement

Plan for a Healthy Retirement

One of the consequences of an aging population is that there will be increased pressure on an already overloaded public health system. Advances in technology will add to the pressure as new but often more costly procedures become available. Health care costs are 10 times higher in old age than in mid-life. By 2050, 1 in 4 people will be aged over 65, compared to 1 in 8 now. Not only will the total spend on health increase dramatically but there will be fewer taxpayers to fund it!

Possible outcomes over the next twenty years could include:

  • Longer hospital waiting lists
  • Reduced Government spending on other important areas such as education and social welfare to help fund health care
  • Access to medical treatment based on ability to pay
  • Increased reliance on private health care
  • Unaffordable health insurance premiums

Research shows that good health is one of the main determinants of happiness. Planning for a happy retirement means planning for a healthy retirement. Strategies you can use to plan for good health include:

  • Maintaining healthy practices throughout your life with regard to fitness, diet and health checks
  • Staying active and working beyond the age of 65 (good for your finances as well as your health!)
  • Setting aside a separate fund of money to be used either to cover the costs of private health care or to pay the premiums for health insurance
  • Reducing the cost of health insurance by increasing your excess and setting aside funds to cover the excess.

There is no question that paying for health care is a major retirement issue now and it will become critical. As medical technology advances, you will want nothing but the best available treatment. Make sure you can afford it by planning ahead.

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Don’t Outlive Your Money

Don’t Outlive Your Money

It is said the biggest financial risk anyone takes in their lifetime is the risk of running out of money before they run out of life. Everybody reaches the starting line for retirement in different financial shape. There are those with little in the way of savings because they decided to spend while they were still young enough to enjoy it, or because they were unable to earn enough to save. There are those who squirreled small amounts of money away and have a small retirement nest egg. Others come to the starting line with significant amounts through having been regular contributors to a subsidized superannuation scheme or through being the beneficiaries of a large inheritance. What you have at the starting line of your retirement life will determine your standard of living for the next twenty or thirty years. Those with little or no savings will have their standard of living determined for them by the controllers of the public purse strings, with inflation being their constant enemy. For those with money to invest, the challenge becomes one of making what they have last the distance. There are three stages of retirement; the ‘live it up’ stage when you spend money on enjoying life, the ‘fix it up’ stage during which your car, house and body need maintenance, and the ‘wind it down’ stage when you need to pay for care. Invest your money in three ‘tranches’; one for each stage. The first amount should be invested in stable, income producing investments for five or ten years, while the second and third amounts can be invested for ten to twenty years with low to moderate exposure to growth assets (shares and property) to help protect against the effects of inflation. This will reduce the risk of outliving your money.

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Getting Used to Working Less

Working Less

While most of us say we can’t wait for retirement to be able to do all the things we’ve always wanted to do, the problem is how to fill in the thirty years or so after retirement, especially as we are living longer. Retiring from work doesn’t mean retiring from life.

 According to a recent survey in North America, 40% of recent retirees said they were happier when they were working because they felt they had a purpose and structure to their days. Retirement isn’t always what people expect. There’s an increasing trend for people not to retire outright, but to start working less. Research has shown that retirees who cease to contribute and to be productive and active, die earlier than those who continue to engage fully in society.

 The beginning stages of retirement are like a honeymoon. You don’t have to get up to go to work, you can play golf or go fishing whenever you like and you don’t have deadlines. But the euphoria and the novelty soon wear off; after all, there are only so many lattes a week you can drink and only so many times a week you can go fishing. Your former identity is no longer relevant and you need to re-evaluate who you are and what we want out of life. It’s important to keep all aspects of your life in balance; that is your finances, home life, health, relationships, leisure time and your purpose in life.

 Being positive is an important part of enjoying your retirement and contributes to living longer. Some people enter retirement filled with negative thoughts and fears of ill health and lack of money. The key to happiness is to be happy with whatever you have and to be thankful for whatever is good in your life.

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Don’t Just Retire: Reformat!

Dont’ Retire: Reformat!

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?

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UK Pension Transfers

UK Pension Transfers

Immigrants from the UK and New Zealand residents who have worked in the UK usually find themselves leaving behind their locked-in pension funds when they arrive in New Zealand. This can present a number of difficulties.

Once you become eligible for payments from your fund, you will need to pay tax on those payments as well as bank transfer fees. You will also be exposed to exchange rate changes so that the amount you receive as a pension will fluctuate over time. If you pass away with your money still in a UK scheme, your spouse is likely to receive a pension worth only half of what you would have received, whereas New Zealand retirement schemes pay the whole benefit to your spouse or dependants. UK pension funds are classed as Foreign Investment Funds by Inland Revenue which means that if you are a New Zealand tax resident you may have to pay tax on the investment gains.

UK pensions can be transferred to New Zealand but can only be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) without incurring tax. Up to 40% of any money you transfer may go into an unlocked fund and can be withdrawn before retirement age without tax liability if withdrawn more than six years after leaving the UK. By contrast, some UK pensions allow you to take 25% of your funds after the age of 55 without paying tax. Being able to withdraw funds can help with changing circumstances such as marriage, birth of a child or change in employment status.

Having your funds in New Zealand means it is easier to obtain information on how your investment is performing. The transfer is best done with the assistance of a financial adviser to avoid unnecessary penalties and to be aware of your options.

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How to Manage your Money in Retirement

Investing in Retirement

One of the biggest challenges in retirement is how to invest your money to provide an income while still protecting yourself against the eroding effects of inflation and income tax. Investing in fixed interest gives certainty of income but returns will be low and unable to keep up with inflation. The alternative, investing in growth assets such as shares and property, will give a better return over the long term but with increased uncertainty in the short term. For that reason, many retirees are afraid of investing in shares. However, there is a way of structuring your portfolio so you can use both income assets and growth assets to advantage. Here is how you do it.

Divide your portfolio into three amounts. The first amount is a lump sum of cash that is the equivalent of 6-12 months worth of income. For example, if you need $1,000 per month to top up your income, set aside $6-12,000 in cash. This amount should be placed in a high interest on-call account.

The second amount of money should be the equivalent of 1-3 years income, so in our example you would set aside $12-$36,000. This should be invested in fixed interest investments which are of good quality.

The third amount to be invested is whatever is remaining after setting aside the first two amounts. These funds should be invested mostly in growth assets with a small amount of fixed interest.

The way this strategy works is that over a three or more year time period the gain from your growth portfolio can be cashed up and put into your income portfolio to keep both portfolios constant. The interest from your income portfolio can be put into your on-call account to keep it topped up, along with proceeds from investment maturities as required.

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