Bill is 64 and Mary is 62. They would like to retire when Bill turns 65 next year.

Bill owns a small hardware shop in Hamilton, and makes about $50,000 a year. Mary works part-time for a dentist and earns $20,000 a year.

They own a four-bedroom home in Hamilton valued at worth $550,000.

They keep about $30,000 to $50,000 in cash on hand for expenses and in case of an emergency.

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They also own a rental in Auckland valued at $600,000, rented at $600 a week, and one in Hamilton valued at $350,000 and rented for $300 a week.

Total mortgages are $600,000, and the net rental income after all costs is zero.

They have KiwiSavers of about $25,000 each.

They are not a real couple, but typical of the people I meet in my day-to-day work.

A couple of hard issues
Bill and Mary are trying to work out what their retirement income will be, and wisely doing so before they retire.

They have had to accept that they own a "sunset" business that is worth very little, since big operators such as Bunnings and Mitre 10 have all but squeezed out the people with small businesses.

Fortunately their business lease expires next year.

They realise they will have to sell the business for perhaps 50 per cent of the value of the stock, or maybe just have a big sale and close it down when the lease expires.

They like the idea of capital gain on their rentals, especially the Auckland home, but they are not making any rental income -- mortgage interest, rates, insurance and maintenance gobble up all the rent.

But they can't spend any capital gain as income until they sell a property.

One property will have to be sold when or before they retire, so they can reduce or eliminate debt and get income from the other one.

But which one?

Big picture
Often people have too much invested in a single sector, so the obvious thing to do when prices seem good is to reduce overweighted holdings, in this case the Auckland property.

Hamilton property is not cheap, but is not going anywhere much either and may sag when the fall in dairy prices starts to bite.

They have at least four options
• Sell Hamilton, keep Auckland at a $250,000 mortgage and earn net rental of $13,000 a year.

• Sell Auckland and keep Hamilton, leaving them with zero debt and net rental of $13,000 a year.

• Sell both, add KiwiSaver and the business sale and invest.

• Sell the rentals and their big home, and build two units -- one to live in and one to rent.

Work until mary is 65
Bill and Mary are good workers and feel they would like $60,000 a year for a while yet.

Mary wonders if she might work until she is 65.

Bill wonders if he might work until he is 67. Bill can work for his mate, Mike, who needs a hand with his car rentals.

This would also allow them to save some of Bill's super, and let their investments and rental compound for a couple of years longer.

Provided they both enjoy it, an extra two years work can often allow a higher income -- or make their money last five years longer in retirement (two can get you five).

Diversification
If they sell both rentals and add their KiwiSavers and business wind-up proceeds, they could probably invest $500,000.

They could invest in cash, bonds, listed property, and shares, on and offshore. This would give them good cashflow, wide diversification, and liquidity too -- access to cash as and when needed.

Cashflow is king
• $500,000 invested, drawing down $2500 a month is $30,000 a year, increasing at 3 per cent a year for inflation.

• Joint super of $28,000 plus $30,000 gives a total income of $58,000 a year.

If the $500,000 were in a diversified portfolio and returned an average 6 per cent net every year, it would last 23 years.

Invested at say 4 per cent in a bank it would last 18 years.

In summary
Selling one rental now while Auckland is booming might be smart, and then they will be debt free.

Selling the Hamilton rental now might also be smart, before the Waikato gets hit with falling dairy prices.

Having a new unit instead of a big empty house is also an appealing option.

Bill and Mary, like many Kiwis, love property. However selling both rentals, becoming debt free, and diversifying widely would be pretty smart.

Any decision is better than no decision, and so "if in doubt, do half" is good place to start.

• Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle, is available 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.