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Many of us could live 30 years after stopping paid work. How do you prepare for this next stage of your life? Brenda Ward asks the experts how to get ready to give up work.
How much does it cost?
Dr Claire Matthews of Massey Business School does research every year into how much retirees spend – and how much they need to save to live.
The survey divides retirement into a basic, ‘no frills’ retirement, and one with some luxuries like meals out and overseas travel – a ‘choices’ retirement.
She says she was surprised after the first survey in 2012 to find that the average retiree would need moderate savings, even for a ‘no-frills’ retirement.
“I’d gone into it thinking at the lower level, spending would be pretty close to NZ Superannuation, but that proved not to be the case. And the extent of expenditure in the ‘choices’ lifestyle was also somewhat surprising. It was indicating that people have got, in retirement, quite a substantial amount of savings, otherwise they would not be spending.”
Every year, the amount you need to save to afford even a ‘no-frills’ lifestyle grows.
Planning for life after work means adjusting your mindset, says Lynda Moore, of the Money Mentalist.
“You shouldn’t think about it as ‘retirement’,” she says. “You’re just moving into another phase of your life. Instead of going to a nine-to-five job, you have to ask yourself what you actually want to start doing now.”
In any case, the traditional model of getting a gold watch at 65 and walking out of the office forever is outdated, says Kiwi Wealth’s Joe Bishop.
“Many people are continuing to work past 65, paid or volunteering, and we’re seeing people approach retirement in many different ways.”
Maybe you plan to go on working, change careers, reduce your hours, take up hobbies, or do voluntary work. In fact, any of these is better than sitting on the couch watching Netflix, says Moore.
“Suddenly stopping work and getting under each other’s feet is a bit of a recipe for disaster,” she says.
And of course, your new lifestyle is also about how much money you’ll have to live on.
Where to start
Joe Bishop says the first step to a comfortable life is to start actively thinking about retirement. “Most people don’t start to think about it until they’re in their 50s or over, so they’re in a sprint to retirement.”
But he says those who start saving for retirement in their 20s and 30s will retire on a much better income.
Experts agree you should start by seeing a financial adviser. You may be pleasantly surprised, says Moore.
“Some people will be told they’re not going to run out, and that they can spend more money.
“Others will get a nasty shock. But if you’re going to be short of money, it’s best to find out sooner rather than later.”
She says most people fund retirement with NZ Superannuation as a basic, and then get a passive income stream to cover any shortfall and some luxuries.
“This income stream could be from rental properties, selling a business and investing the proceeds, interest, or dividends and growth from shares.”
Do the numbers
Moore suggests you figure out the cost of meeting your needs for food, clothing, and shelter, plus have some spare for emergencies.
Bishop says your financial adviser can give estimates on how much money you might need to save.
There are also online tools, like the retirement calculator on government website Sorted.org.nz, or Kiwi Wealth’s own calculator, Future You. Take action to achieve that target, Bishop says.
“Are you saving enough? Do you have enough invested, and with the right risk profile?
“Those with a longer time horizon might be able to take more risk. If the stock market has a downturn, you’ll likely have the time to make any losses back up and still be headed in the right direction.”
Adventure before dementia
Many of us have a list of activities we’ve always wanted to do, a ‘bucket list’. Why wait? Why not plan to do them now instead, and adjust our current spending behaviour so that we can, suggests Lynda Moore.
“When we’re in our 40s or even 50s, we think when we stop working fulltime, we’re going to want – and be able – to do all those activities that we haven’t done yet.
“Don’t put it off until too late – you may find that your body can’t keep up with you.”
If you do want to travel, renovate, or buy a campervan, tell your financial adviser, she says. They can help you work out the numbers.
A mortgage in retirement?
Dr Matthews says the Massey survey shows most people today are retiring without a mortgage, but she expects that trend to change, because fewer people in recent generations own their own homes.
“The currently retired cohort are baby boomers and the generation before that. They have a very high level of home ownership, and most of those have been able to pay their home loan off.
“This is one of the significant changes we’re expecting. House prices have increased, and people have continued to borrow.”
Dr Matthews says people will still be in their own homes come retirement, but more likely will have a mortgage, which will add to their retirement costs.
Risk and reward
How much your money could earn you as an investment depends on your time horizon and how you feel about risk, says Bishop.
Generally taking on higher risk might reward you with higher returns. You need to take on enough risk to achieve your goals – but not more than you can handle.
Says Bishop: “Your attitude to risk is about how comfortable you feel when you see your balance go down.
“What’s important is to keep your eye on that time horizon and what you’re looking to achieve.”
A financial adviser can help you with your risk profile, and help you work out which investments suit your personal situation.
Keep your KiwiSaver
You can still benefit from your KiwiSaver account after 65. If you still work, your employer may contribute.
“Some people think they should take their money out when they reach 65, but actually KiwiSaver’s a fantastic tool to manage your investments after you’ve retired,” says Bishop. “You might be able to work with your KiwiSaver scheme provider to start to turn your account balance into a regular income, like an annuity.”
Contact your provider to see what options are available when you turn 65.
Your fees could also be lower than other types of managed funds.
Tony Robbins’ retirement dreams
In inspirational speaker Tony Robbins’ book, Money: Master the Game, he says there are five levels of retirement:
Dream 1: Financial Security. He suggests you calculate the cost of your monthly expenses, then multiply that number by 12. This is your ‘financial security’ income per year. Note: If you qualify for NZ Superannuation, deduct this from the annual total.
Dream 2: Financial Vitality. Add half your luxury lifestyle expenses to the financial security sum.
Dream 3: Financial Independence. This is the cost of your lifestyle now. Multiply it by 20 or 30 years.
Dream 4: Financial Freedom. The cost of a better lifestyle than you have now. Add in the luxuries you want to your current annual total.
Dream 5: Absolute Financial Freedom. Anything you want, any time you want it, never worry about money again. Write down everything you’d want, then work out the cost.
Money: Master the Game is published by Simon & Schuster, available on Amazon for NZ$24.
Downsize to free up capital
Many people tend to move into a smaller property when they’re retiring, says Bindi Norwell, chief executive of the Real Estate Institute of New Zealand. It’s a great chance to declutter and simplify lifestyles.
“There comes a point where people say, ‘Actually, we’ve got far too much space, it’s getting hard to maintain it, and we’re paying for things we don’t need.’
“Typically, it’s a family home they’re selling, maybe around school zones,” Norwell says.
Many move into apartments because they have good services, and are close to areas they want to spend more time in.
Others move to an area they’ve always dreamed of living in. There may be extra costs too, so do your research. Views, and central and seaside locations come at a cost.
For apartments, factor in the hidden costs of body corporate fees. Don’t try to time the market to sell, she says, rather do it when it suits you.
Norwell says it’s probably best not to renovate first, just make sure your home is tidy, painted, and presented in its best light.
“I believe in getting staging. It can make a massive difference to a property. Make sure your house is marketed appropriately for its style and its buyer demographics, for example, for a younger family.”
Selling a big house and moving to a smaller one to free up capital can make good sense, says Lynda Moore – in theory.
“But when people downsize from their big four-bedroom house, it can cost almost as much to get into a two-bedroom apartment. Only downsize if it works for you.”
Planning for the future is all about knowing your numbers and asking for help from the experts, like financial advisers, if you think you need to, says Moore.
“If you need help, this is the time that you really have to ask for it.” Only splash money around on a new car, travel, or a house renovation if you’re not going to leave yourself short at the other end, she says.
“Decide what’s really important to you. Because once you know what’s important to you, it ceases to be about anybody else and their expectations.”
What about a legacy?
Do you want to leave a legacy, and pass something on to your children? If you do, you may have a different risk and time horizon, says Joe Bishop.
“You need to factor that into your planning. If your timeframes are extended by decades, then that could mean you take more risk with your investment.”
Moore suggests you talk to your adult children. “You could say to the kids, ‘I’m going to leave you nothing’, and find they look at you in abject horror. ‘What about our inheritance?’” Or they may be happy to see you spend all your money.
Published 29 February 2019
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.
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