How to get 5 for 2
If you are getting close to retirement age, but it appears you don’t quite have enough money, consider working for two more years past age 65.
While you are working you can live off your wages or salary, and save your government super. You might even save more money if your wages or salary exceeds your expenditure.
Work your money harder for an extra 2%
A conservative portfolio invested across bonds property and shares is likely to earn (on average) an extra 2% over and above bank rates over the medium to long term.
A properly constructed portfolio with extensive diversification should achieve this without too much risk, although you will have to put up with some volatility.
Say $200,000 invested at 2% above bank rates equal $4,000 PA.
That is $4,000 PA x 20 years in retirement - an extra $80,000 above bank rates.
Other retirement cash and income sources
Subdivide your property.
Go fruit picking in season.
Rent out your house and do live in property management.
Operate a bed and breakfast from your home.
Use old skills and work from home e.g. carpenter, cabinetmaker, motor mechanic, sewing, remedial teaching, consulting, doing locums, teach one-on-one maths, English or art
Return to work part-time for the people who bought your farm or business, or work part-time for your previous employers.
Manage a business for someone who works seven days a week and needs a break.
Sell your house and buy two units – live in one and rent out the other.
Rent out your spare room.
Downsize but not too soon
The obvious one is trading down your home and buying a smaller one, but keep your powder dry - don’t do it too early in retirement.
When downsizing your home to release cash, be careful that real estate agent’s fees, lawyers’ fees, moving costs, alterations, and renovations do not erode your funds too much.
It is all too common to see the hoped-for $100,000 drift down to $50,000.
Calculate all your costs carefully and get independent professional advice before signing anything.
Move to a cheaper town
Lots of them in NZ - Kaitaia, Foxton, Wanganui, Oamaru, or Ekatahuna.
Not ideal but cash in hand is a whole lot better than staying put and living on the breadline.
Retirement villages - fall back may not work - a one-way street
If you buy a unit in a village and decide five years later that you want out again, the village operator will usually deduct 25% to 30% of the purchase price.
You pay $400,000. You want to leave. They deduct 25% ($100,000).
You get $300,000 - ouch!
Now this is not a problem if you don't need to exit, but it is if you might run low on money.
Much later on
Build a granny flat on your children’s backyard. Maintain flexibility though – the kids might move one day so make sure the unit is easily moved and/or sold - preferably fitted with wheels.
Last resort - reverse mortgages (RAM)
In theory RAM’s are a great idea. They allow you to take a reverse mortgage over your house and the mortgage company advances you money every month.
A RAM increases quite quickly with compound interest, and you may not be able to fall back to a cheaper property later on, because you will owe the mortgage company quite a lot of money.
Sell your house progressively to your children
A somewhat complex option that can be a win-win all round. There will be more cash flow for you and an investment for them.
Older Kiwis have their pride and may not like this option, but think about it – each child probably cost you $100,000 to get from birth to age 21.
No, they don’t owe you, but why not work together for the common good.
And if you reverse mortgage instead, they will probably inherit nothing.
Don’t be hasty or over-react
Don’t be hasty, and keep any assets that you can fall back on up your sleeve for a rainy day.
And get good advice before making any major move or decision.
This article was written by Alan Clarke, who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes a regular blog on www.investandretire.co.nz
Alan is an independent authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.