When we get to retirement, most of us will slowly but surely have to consume our savings.
Our government superannuation for a couple is only $28,000 pa, however a good standard of living in retirement requires more like $40,000 to $60,000 pa. This exta money will have to come from savings, the sale of assets (farm, business, super scheme, downsized home, inheritances) and so on.
Many of us will be retired for 20 to 30 years, but inflation is like rust - it never sleeps. The cost of living creeps up and eats away at our savings.
Say you need $50,000 income at age 65. If inflation is 2%, by age 70 you will need $57,000.
By age 75 you will need $66,000.
Perhaps it's not as bad as it sounds as many of us slow down as we get older and do less, however, it would be prudent to spend less.
But back to those who can’t spend..
Some people are born with the savings gene, and others learn it.
The people who are the best savers are often the same ones who have the most trouble changing over to spending their money. That’s a shame, since they deserve it and no-one lives for ever.
How to overcome it:
- Get independent advice
- Do the sums
- Use a retirement calculator
Here is an example based on a real “can’t spend my savings” case.
Bill & Bet worked and saved hard for many years and invested in rental properties. Now they are retired and think they need an income of $50,000 per annum to live, plus another $15,000 per annum for visiting their children overseas.
They had four rental houses, but they never seem to have enough income and had no cash in the bank. Why not? Because all their rentals were geared with borrowings and seeking capital growth - a typical accumulator scenario.
By the time they paid the interest and expenses, there was no rental income for them. They were still operating/thinking like savers and accumulators, but when they retired, their income stopped.
We suggested they sell three rentals, clear the debt, and keep the best one. They found that idea hard, but after a few months (of low income) they did it
That left them with $400,000 in cash and one debt free rental.
Joint national super - $28,000
Rental nett of expenses & tax * - $10,000
Investments of $400,000 ** - $18,000
Total after tax - $56,000
* income only - excludes any capital gain
** a diversified portfolio at an estimated 5% nett return, drawing down $1,500 per month
If inflation is 3%, the $400,000 will last 29 years.
If and when the $400,000 runs out, they will still have one rental and their home. They could sell the rental anytime along the way and they could also downsize their home later on.
Bill & Bet want to keep all their assets intact to leave to their children (unusual these days).
That probably can’t happen if they live relatively long lives. However, their children are likely to get a tidy sum and have their whole working lives in front of them to emulate their parents' good savings habits.
By selling three rentals, they repaid all their debt and were able to diversify much more widely.
Diversified investments have other advantages too - bonds and shares are liquid and can be cashed in anytime.
So they can spend some and have peace of mind too
They can now have the income and lifestyle they want. They can do so without worrying as their good savings habits have put them in a strong position and they are highly unlikely to run low on money late in life.
All they needed to do was to get good independent advice, do the sums and use a retirement calculator.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge