Retirement planning often only works with the average age people live to in mind, while many live much longer. Photo / AP
For those planning retirement funding, www.sorted.org.nz advises that on average, 65-year-old men and women can now expect to live until they're 86 and 88 respectively.
This over-simplification appears to put at risk those living more than the average.
About half of the people now 65 will live beyond 85 or 86, with quite a few living perhaps 5 or 10 years more. If they have saved only enough to live to 86, those fortunate enough to live much longer face the risk of running out of money in their last decade of life.
I've had at least five advisers over the last 30 years, yet I have never seen that risk mentioned by an adviser, as their emphasis is always on planning finances to last until the average age at death.
I am 77, retired for five years, and now in the (fortunate) position of deciding whether to plan my savings to last about nine years or, say, another 19 years. Quite a difference.
Presumably Sorted's emphasis is to encourage people to save for their retirement, but the above risk should at least get a mention.
You're understating the case. Some of us are going to live - heartily - to well over 100!
My first reaction to your letter was, "Doesn't everyone realise that an average is just that, and that half the population will live longer." But perhaps that's expecting a bit much. And you're right of course - it's not ideal to have lots of people outliving their savings.
Tom Hartmann at the Commission for Financial Capability, which runs Sorted, acknowledges that what the tool says isn't perfect, and they're planning to revise it.
"Our thinking to date is that we would try to give the average life expectancy based on Statistics New Zealand's cohort life tables. In addition, we would then enable our users to adjust this estimate themselves in order to get a more tailored response," says Hartmann.
"We are currently reviewing this approach, however. Ideally we would be able to give people a more precise probability of them not outliving their savings - should it be 75 per cent, 85 per cent, 95 per cent? 'TBD' (to be decided) as they say.
"While we appreciate the desire to 'bounce the last cheque to the undertaker', we wonder whether it would be less stressful for people to build more of a buffer and cut themselves some slack?"
Watch this space - or rather the Sorted space.
Meanwhile, your comment on advisers is a worry. When they're dealing with a client one on one, they certainly should go into more detail, and include a Plan B in case you live a lot longer than average.
One website that gives a second helpful number is www.superlife.co.nz. Its calculator, at www.tinyurl.com/nzexpectcalc, asks for your gender and expected retirement age. In your case, that would be "male" and "72". It then tells you not just that the average life expectancy for a 72-year-old male is 12.8 years, but also that "25 per cent of all 72-year-old males live beyond age 89.8."
That gives you a good feel for the "upside risk".
You probably have a fair idea of whether you're in the top quarter.
For a more accurate picture, try a calculator developed at the University of Pennsylvania, at www.tinyurl.com/expectcalc. It asks about your health, family health, driving habits, diet, stress and lifestyle. It even asks whether your father worked in a manual or non-manual job. In the process, you learn about ways you could improve your chances of making old bones.
Beyond all this, one source of comfort is that - if you do outlive your savings - you should always have NZ Super. While Super payments could be somewhat less than now, government analysis shows there will be no need for drastic cuts. And people in their late 80s and older often say they don't tend to spend more than NZ Super.
Still, if you want to be the last of the big spenders at 95, you could maybe move to a smaller home or get a reverse mortgage. While those mortgages aren't popular because compounding interest can double or triple a debt - or more - over several decades, that's not going to happen to someone in their 90s.
Another strategy is to set aside, in early retirement, money that you plan to leave to a charity. If you live to 90, you become the charity!
It seems to me that it is wise to pay off our mortgage before doing saving. But I'm unsure, and worried that this would leave us with an unbalanced portfolio (that is, all eggs in the mortgage basket!) for too long.
Your thinking is sound in both sentences!
Generally, it's smart to pay off your mortgage fast. To do better with savings, you need a return of more than the mortgage interest rate, after fees and taxes. And you can't get that without taking considerable risk, while mortgage repayment is risk-free.
However, KiwiSaver is different. The returns are raised by the government tax credit - and even more if you get employer contributions. So KiwiSaver probably beats extra mortgage payments.
And that argument is boosted by your "eggs in baskets" point. Being in KiwiSaver - which invests in bonds, shares, cash and commercial property - spreads your risk beyond just housing.
Next year I turn 65 and I have to decide what to do with my KiwiSaver. I'm in a KiwiWealth balanced fund. I also have a separate balanced private portfolio with it.
I hadn't planned on touching this money for five years, as I have interest from a small bank deposit and income from a rental investment. This along with some part-time work and superannuation should give me a modest income.
I'm currently paying higher management fees on my private portfolio and had thought to transfer those funds into KiwiSaver. However, after reading your reply last week that a government could change the rules about how much one could annually withdraw in retirement, I'm now wondering if this would be such a good idea.
Also, with a five-year plan, should I be more conservative with my portfolios?
I'd welcome any advice you could give me.
It would be a pity if you or others overreact to my comment last week.
The purpose of KiwiSaver is to supplement NZ Super. So I think we can be confident that no government will get in the way of somebody making steady withdrawals from KiwiSaver. The worry in some government circles is that people are emptying their accounts and blowing the lot on a world trip or similar.
Of course that might be perfectly rational, if the person has other retirement savings. And even those without other savings might empty their KiwiSaver account to pay off their mortgage or other debt, which is also rational.
It might therefore be hard for a government to monitor KiwiSaver withdrawals in retirement. In any case, I doubt if any government would introduce anything drastic, as they would lose too many votes. If your plan is to gradually spend your KiwiSaver money, I don't think this issue should concern you.
Your thinking is good about fees. You could even transfer the money into KiwiSaver now, to get the lower fees straight away. The loss of access to that money for a year doesn't sound like a problem for you.
On risk, you might want to put some of your money in a conservative KiwiSaver fund, to be spent in the next two to 10 years. The rest could stay in a balanced fund, or even a growth fund, to be spent after more than 10 years. Over time, move some money from the higher to the lower-risk fund as you get within 10 years of spending it.
Money that you plan to spend within a couple of years should probably be in a cash fund or bank term deposit. Then the balance can't fall right before you spend it.
Almost all KiwiSaver providers will let you invest in more than one of their funds.
We have two term deposits totalling about $30,000 coming due soon. I am wondering whether to put them back in term deposit.
Given that interest rates are falling, I was thinking of renewing them for either three or five years. However, it then occurred to me that I could put it into my KiwiSaver fund, currently a growth fund. Since I am 62 this year, I would have access to the money in three years.
All our other savings, apart from a rental, are in term deposits in three different banks for about a year at a time. Is putting it into KiwiSaver a good idea, or perhaps some other managed fund? What is the risk of KiwiSaver funds being lost in the way that people like my parents lost money in finance companies?
Firstly, take care with assuming that any interest rate trend - downwards or upwards - will continue. It's impossible to accurately predict three years ahead, let alone five years.
Not long ago, in early 2008, you could get well over 8 per cent for a six-month term deposit. Who knows if that will return? You might feel a bit sick if, a year or two from now, you've got all your money in a five-year deposit on a rate that by then looks low. To get round this, I suggest putting some money shorter-term and some longer-term.
On investing in a KiwiSaver growth fund, that's a good idea only if you don't plan to spend the money for 10 years or more. But you could go into a lower-risk KiwiSaver fund. See the last Q&A.
And on the risk of losing your money in KiwiSaver, see the next Q&A.
I have a question about security of KiwiSaver investments. If a KiwiSaver fund provider went bust, would the individual KiwiSaver investor still own the investments and therefore not be out of pocket?
Yes. The provider doesn't own the assets, the KiwiSaver member does. The provider just decides how to invest the money and runs the operation.
Each provider has a supervisor - a separate company - whose job is to make sure members' money is invested where it's meant to be. The supervisor also holds the members' assets on trust - so the money in members' accounts would be ring-fenced if a provider collapsed.
If a provider closes down for any reason, everyone's accounts are moved to another provider - although this takes some time to organise. Anyone unhappy with the new provider can then switch to any other provider they prefer.
There are no government guarantees with KiwiSaver, but things would have to go horribly wrong for members to lose money because of a provider's problems.
However, it's important to remember that even when providers are behaving properly and following the rules, KiwiSaver balances fall when markets fall.
•Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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