HOW MUCH MONEY DO YOU NEED IN RETIREMENT?
After your pension funds have been transferred, what are your expectations for the future?
If you transfer more than $300,000, you may choose to be invested in an individualised portfolio utilising an independent custodial service. This will give you:
More choices on where to invest.
Tax deductibility of fees: The trustee of the QROPS plan makes these deductions. You do not need to declare income earned on a superannuation plan as it is paid by the fund manager.
Usually a better investment return compared to a standard Balanced fund, for example, due to the funds we use that have significantly lower fees than actively managed funds.
On-going investment advice: Your portfolio will be reviewed regularly by highly qualified investment analysts.
Access to your investment adviser as required.
Website access to check your investments at any time.
If you have a smaller investment portfolio, or want simplicity, you can:
Contact your adviser from time to time.
Receive annual reports.
Be assisted with service requirements such as:
withdrawing a portion of your funds when you turn 55
switching from one investment fund to another.
switching into another superannuation QROPS approved scheme if desired. This would usually be for someone who wants to move from a standard fund to an individualised investment portfolio or vice versa.
Investment advisers at Lyfords often help their clients to understand that their transferred pension funds and NZ Superannuation benefits will be insufficient to provide their desired retirement income.
At Lyfords, we prepare retirement calculations for you, and provide recommendations on where to invest and how much more you need to save in addition to your current savings and accumulated pension funds in order to attain your desired retirement income.
How much do you need in retirement?
Kiwis are generally optimists and poor savers. The majority believe they will be financially independent when they retire and have stopped earning an income, but you need more than optimism to be financially independent when you stop earning an income.
If you are not saving enough, or investing appropriately, it is unlikely that you will be financially independent when you retire.
It is important to review your retirement savings plan on an annual basis to ensure that you are on track to enjoy an inflation adjusted, after tax, retirement income that is at a realistic level.
In addition to your retirement savings you will be able to receive NZ Superannuation for the foreseeable future, but one day the Government might offset NZ Super against other income.
The NZ Superannuation rates are set by Work and Income New Zealand (WINZ). View current rates.
Single $24,078 (taxable, 2018 rates)
Married couple both qualify $36,479 (taxable, 2018 rates)
If you receive New Zealand Superannuation, it will be in addition to the income derived from your personal retirement income.
Is this enough?
Maintaining a a similar lifestyle when you are no longer working to when you were working is probably more expensive than you realise. If you or your spouse suffer a serious illness, such as a stroke or early dementia, and need to move permanently into the hospital wing of a rest home, the bulk of your retirement income will have to be used to pay rest home fees. That’s how it is.
There will always be unexpected costs associated with living in the community.
The dog needs surgery. The cost is $3,000. What do you do? Put the dog down, or pay for the surgery?
The car tyres need replacing. Cheap ones cost $800, the safer ones cost $1,600. When you were working, you would always buy the best quality tyres. Which ones are you going to choose now? Cheap or safe? Would you risk driving with your grandchild while knowing you had less safe tyres than you could have? Is the integrity of your priorities being compromised because of your limited income?
Your house has developed a leak, and the general consensus, after discussions with builders and architects, is that the construction has a major fault which has worsened since recent earthquakes. Do you hope it will go away by itself? Or do you pay $85,000 for the repairs? What impact will this expense have on your retirement funds?
You have lived in your family home for many years. Your rates have increased astronomically because the value of your property has rocketed up.
Now that you have recently had to repair your house, pay for the vet bills of your adult child’s dog and replace the tyres on your car, you can’t afford to pay the rates. What are you going to do? Will you leave your community and move to a lower cost area? Will a smaller house cost less to own? Will you move in with your children? (Just kidding).
It looks as though your entitlement to NZ Superannuation will be a good buffer for these unexpected expenses.
How much do you need to invest to earn an after tax income of $65,000?
Using the following assumptions:
Balanced investor profile
Investment returns are inflation adjusted and net of tax
Funds required to age 93 = 28 years. If funds run out at that time, sell the house and move into a rest home or take a reverse equity mortgage.
You need a lump sum to invest of $1,150,000 to receive an after tax and inflation adjusted income of $65,000 p.a. for 28 years when you will be 93.
Is that the amount you thought you would need?
How much have you saved so far? Are you on track?
Is $65,000 p.a. going to be enough to maintain your lifestyle?
What are you going to give up in retirement?
How will you replace your car?
How will you fund holidays?
What about visiting your grandchildren or other family members?
How will you pay for your health insurance?
Lyfords provides ongoing retirement advice. It's not just about transferring your pension. It’s important to talk with a financial adviser on an annual basis to ensure that you are on track to achieve your retirement objectives.
When you are ready to retire, you have probably spent 30 to 45 years building up your wealth. It makes sense, then, to protect it and ensure it grows as effectively as it can without taking excessive investment risks.
One solution to being financially independent in retirement is not to retire. You can only do this if you enjoy your work and have control over it, which can work for the self employed, but it’s an option with less certainty for employees. Your employer might not want to employ someone who seems to be working less effectively than younger employees who are being paid less.
As long as you have good mental and physical health, it is reasonable to expect and plan to continue to work far later than age 65.
Rather than retiring suddenly, investment advisers at Lyfords recommend reducing your work days to 4 a week. Later, reduce them to 3 days.
Or consider becoming a business owner. Definition of a business:
A proprietary operation that can work without you.
There’s more to work than income generation. When your children have left home and you no longer have a mortgage, it’s great to have a business that can work while you’re having a holiday.
There are days when the sky is grey and it’s cold. On these bleak days, staying home can be isolating. At work, you could be having conversations with very interesting people. Work isn't just about the money.
Continuing to work to say age 70 or 75 may become the norm for many. You need to plan how to manage this especially if you are currently an employee.
The benefits of working later into your retirement years are:
Your work will seem much easier because you have spent 30-45 years to become a master – with those finely honed skills you are now an authority. You can delegate the more boring parts of your work to younger people while you work on the things that have the greatest interest to you. You will take pleasure training younger people to become competent.
You will continue to have meaningful conversations with your colleagues and business associates. This makes life seem worthwhile.
You will have fewer years in retirement, so you won’t need to have saved as much. You’ll be able to spend more time and money on your holidays.
If you or your spouse needs to enter a rest home, you will have a greater likelihood of being able to pay the rest home fees without decimating your accumulated wealth.
Save as much as you can for as long as you can.
Plan to be self employed so that you can work another 5-10 years after you have reached the official retirement age of 65.
Review your retirement savings programme every year with your investment adviser. Maybe you can retire earlier than you thought you could if this is what you want.