What to do so your nest egg lasts the distance
Our generation is the longest-lived ever. Check out a Statistics NZ spreadsheet to get an idea of how long your retirement will be. If you’re fit and well and you eat a healthy diet, you’re probably set to live a full life span – which, in New Zealand, is 20 years past retirement age, on average. Plus, more and more people, both men and women, live well into their 90s – that’s going on 30 years of retirement!
Saving for that length of retirement is difficult for some, and plenty of us retire with so little that even the occasional meal out isn’t affordable. A study by Massey University and Westpac revealed that nearly half of retired people worry that their nest egg won’t be enough to keep them in comfort, and some struggle just to pay the bills. Giving up on your retirement dreams is hard, but when the money isn’t there, you don’t have a choice. Or do you?
We talked to Michael Cave of Cave Financial, and he assures us that there are several things you can do to improve your situation.
Make a solid plan
Not retired yet? It’s time to plan your future and work out how much you’ll need to save. Add up what you need right now for outgoings, and save the rest. However, just tucking your spare money into a savings account isn’t enough – bank interest on savings is so low that your money won’t be working for you.
“KiwiSaver is an option, but most people don’t know where to start when it comes to growing capital,” says Michael. “In that case, a financial advisor can help – setting goals and timelines, and offering investment opportunities that will get your money working.”
Keep working – for a while
More and more people are continuing to work after 65. If you’re fit and well, there’s no reason why you should fully retire. You might want to cut your hours so you can play more golf or take your grandchildren fishing, but continuing to work will certainly benefit your nest egg. It also offers a less abrupt transition from full-time work into a vastly different way of living.
Think about an annuity
Rather than big-spend dreams, you might want the security of a set income, keeping you in comfort for as long as it takes. Investing your KiwiSaver nest egg in an annuity can give you that security. There are two sorts: fixed and variable.
A fixed annuity, often provided by an insurance company, gives you a regular set payment until you die, even if you live to be 100. You might also be able to occasionally draw out a little extra for emergencies. Michael advises that you ask about funds left over after your death (if any).
“Some companies will retain leftover funds,” he explains. “Others extract their fee and pay the residual into your estate.”
With a variable annuity your money is invested, and you draw down regular amounts. Alternatively, your capital stays working and only the interest is available to spend. There are risks with both, as Michael explains:
“Too large a regular payment could quickly erode your capital, and income from interest will vary, depending on the global financial situation.
“Factor in the investment fee, and ensure you can draw down extra funds when you need them,” he advises.
Nurture the nest egg
There are levels of investment risk – the higher the risk, the greater the potential return – or loss. People nearing retirement are often advised to put their KiwiSaver and other investments into conservative funds – safe, but earning less.
Michael says if you expect a long retirement, you’ll want your nest egg to keep growing.
“Don’t risk it all in a growth fund, but it’s a great idea to keep a percentage in those riskier, higher growth funds,” he advises. “How big a percentage? Subtract your age from 100 – if you’re 65, that’s 35%. It’s not much to risk – just enough to keep your money earning.
“Drop the percentage as you get older,” Michael adds. “If you’re still worried about risk, talk to a financial advisor for other options.”
Stretch out your money
Stick to a budget and save anything left over, so when the opportunity comes for that overseas trip, you’ll have the cash ready for it. Similarly, if your investment isn’t delivering the interest you expect, instead of dipping into your capital, delay big spends like a new car or renovations until the market recovers. Trim your budget for a while, and let interest accrue so the total will last longer.
It’s never too late to plan
You may already be retired, and a bit nervous about the future. Take a breath and find ways to reduce your outgoings. Do you have insurance you don’t need now the kids are grown? Talk to an advisor about what might be more appropriate. Still in the family home? Find something smaller, and add that liberated capital to your nest egg. Do you have family you’re happy to live with? Sharing expenses gives everyone a win. Paying rent? Find a cheaper place, or apply for an accommodation benefit.
“A financial advisor can help develop a budget or consolidate debt,” says Michael. “There are lots of ways to trim expenses, ways an expert can spot.”
Retirement dreams can come true
Don’t wait – now’s the time to prepare for 20 years of retirement. Nurture relationships, develop hobbies and dream dreams – then create a plan for how to realise them.
Save and invest, follow a budget, and keep yourself fit and healthy. Set your goal, whether it’s to renovate, travel, comfortably retire – or all three! Whatever your dream, it takes money to make it come true. If it’s all too hard or you’re not sure where to start, a financial advisor could help.