Cracking a nest egg plan to keep you comfy
With the market’s focus on getting people into KiwiSaver, a growing number of Kiwis hitting retirement are finding there is little in the way of products or advice for them. Jason Krupp looks at some of the key factors they need to consider to protect their nest eggs.
After 40-plus years in the workforce it’s probably safe to assume most people hitting retirement age are looking forward to spending at least a little time with their feet up.
But while they can deservedly take the weight off, the fact remains that people are increasingly living longer than they used to – and their retirement savings may need to keep earning for at least two or more decades if they’re to fund their dotage in comfortable style.
The challenge for the newly retired is that there isn’t a lot of information out there on how to protect, let along grow, their nest eggs. In fact, if you search Google for “KiwiSaver divestment”, the search engine will ask you if you mean “KiwiSaver investment”.
That’s not too surprising given the relative maturity of the current retirement landscape.
KiwiSaver has only been operating for five years, and the focus has been on getting people enrolled and contributing on a monthly basis. To some extent that has been achieved, with 2 million Kiwis signed up, but the investment advice and education focus has remained on those contributing to the system, not those exiting at the other end.
The thinnest edge of the KiwiSaver population wedge is only now starting to hit retirement age, when they can start drawing down on their savings.
While that explains the dearth of investment advice and products for retirees, it doesn’t really help those needing advice on what to do with their pension nest egg.
Financial adviser Alan Borthwick, of Dux Financial Services, says that with a number of financial and economic considerations to take into account, probably the best place to begin is with a vision for retirement.
This includes lifestyle, as well as whether you want to travel, move to the country, keep working part-time, or spend your twilight years catching up on the hobbies that work interfered with.
You can then look at your savings, assets and income (from superannuation, rents or interest and dividends).
Borthwick says this will give savers a yardstick to assess whether their nest egg can achieve their goals, and if not, where the compromises need to come from.
It’s vital at this stage to carefully assess the impact of inflation on retirement savings, a complicated hurdle many people fail to correctly factor into their retirement planning.
“The biggest risk to retirees is not capital loss but spending power loss,” Borthwick says.
A good example is an expense such as groceries, which may cost a retired couple $10,600 per year now. At a benchmark inflation rate of 3 per cent inflation per year, the same amount of groceries would cost $14,250 in 10 years.
If you haven’t budgeted correctly for the extra $3650 a year you’ll be paying for food, it will have to come from somewhere else in a limited budget.
Borthwick says that even if savers factor in 3 per cent inflation – which is at the top of the Reserve Bank’s target band – they often fail to recognise that retirees are exposed to costs which increase at a higher rate than 3 per cent, such as medical insurance, power bills and rates on your house.
A preliminary picture should now be starting to emerge of what lifestyle you can afford in retirement, what the potential financial shortfalls may be, and what kind of returns you’ll need on your nest egg to beat inflation.
Much of this information can be calculated on the sorted.co.nz website, a free financial planning site sponsored by the Commission for Financial Literacy and Retirement Income.
However, Borthwick and others suggest savers meet a certified financial adviser to get an accurate plan for retirement that takes all of this complexity into account.
That may seem like they’re feathering their own nests, but the real value an accredited financial adviser brings to the table is the ability to raise issues that savers didn’t consider or lack the technical knowledge to assess correctly. You don’t know what you don’t know.
Issues to consider include whether you want to live in your own home, if you want to leave any assets to your children, can you live off interest alone or will you have to draw down on your capital, and will you be paying for private medical insurance, among a host of other things.
Good quality advice should also guide you to financial products and strategies that are appropriate to your financial goals.
David Boyle, general manager of managed funds at OnePath, says an obvious place for retirees to chase inflation-beating returns is in equities, but they need to remember that the rules that applied during the investment years also apply in divestment ones.
These are principally diversification and correct risk profiling – or in layman’s terms, not putting all your eggs in one basket or a basket that could easily tip over.
The value of diversification was underscored by the collapse of the finance companies in the run-up to the global financial crisis, which wiped out many older people’s savings because they were over-invested in one asset class, he says.
Retirees should also steer clear of investing in highly speculative assets such as shares in emerging technology companies, and instead take a conservative investment approach.
“People should be looking for a good balanced portfolio or managed fund that offers a range of asset allocations in equities as well as more secure assets,” Boyle says, stressing that good advice is vital to getting this risk allocation right.
A rough rule of thumb is to have about 20 per cent of assets allocated to a balanced share portfolio to beat inflation, with the remainder in cash, bonds and property assets.
It’s better to have put this investment plan together well ahead of retirement to give savers enough flexibility to reach their goals and compensate for bumps in the road, he says.
Lastly, with a plan in hand, the next step is to stick to it.