Deciding how to spend you retirement savings can be tough. Photo / File
Deciding how to spend you retirement savings can be tough. Photo / File
Martin Hawes reckons the biggest mistake retirees can make is having all their savings in one asset class - whether that be a rental property or term deposits in the bank.
The former financial adviser, who now describes himself as semi-retired, has just released his latest book entitled Cracking Openthe Nest Egg: How to make your retirement savings last the distance.
He says deciding where to put your money in retirement - and how much of it to spend every year - are some of the toughest decisions people have to make at that point.
"Retirement is a major developmental stage at a time of life when we are not so good at change."
Past generations have put all their money in term deposits or finance company debentures and lived off the interest.
But interest rates are low, people are living for much longer and Hawes says that is not feasible anymore.
Retirees have to live off their capital and many are worried about chewing through all their savings before they die.
"I don't think New Zealand Superannuation will go away [anytime soon] but a lot of people are fearful it will. They are frightened it will be means-tested or something like that."
Another problem Hawes sees is people believing retirement is one long stage where they will need to spend the same throughout it.
"They want that to run right through retirement not recognising there is a natural slowing down and that slowing down comes with lower expenditure. So when you can no longer do the ski holidays or play three rounds of golf a week - the costs do naturally lower."
Hawes says many underspend at the beginning of their retirement when they are most able and active.
"It is not that they are leaving money on the table it's that they are leaving lifestyle on the table.
"And yet that is a very hard thing to convince people to do because they see some future time where they may have to reuse the teabags and live off wine biscuits."
How much is enough?
Hawes says he didn't want to tell people how much to save for retirement in the book but uses an example of a mortgage-free home-owner with $500,000.
"In New Zealand that is aspirational - that's more than the average person would have.
"But it seemed to me to be a reasonable number - an achievable number for a lot of people."
He says there was some research done a few years ago that pointed to Kiwis wanting to double what they got from NZ Super.
"And $500,000 about does that. A lot of people would take that and be happy. A lot of people have a lot less."
Where to put your money?
But regardless of how much you have Hawes says the key is to spread it around a range of investments or, for those with savings of under $100,000, to use a diversified managed fund - the likes of which include KiwiSaver.
"The strategy of putting your money in term deposits or finance companies never really worked - it kind of did because people died before it ran out, or before inflation gobbled it up.
"Now you might be 20 or 30 years retired. And over that time the economy, politics, geopolitics they can throw anything at you over that time so you need an asset class for each season."
He says that portfolio should include property - but sharemarket listed property investments, rather than residential investment property, shares, cash and bonds.
A lot of Kiwis plan to own a rental property and use the income in retirement but Hawes says that comes with major challenges.
"If most people went out and bought a property with their retirement savings they wouldn't have an awful lot left to invest overseas.
"So you are taking a bet on just one asset class and in fact just one asset which is a risky thing in itself. I know that property has done well for people over the last 30 or 40 years but that doesn't guarantee the next 30 or 40 years and we could have situations where you have got deflation where property might do less well and residential rental property is subject to political interference."
Hawes says investing just in rental property could also mean missing out on some of the major global investment trends.
"Amazon shares have produced average returns of 37 per cent per annum for the last 24 years.
"If you were 100 per cent in New Zealand property you would miss out on that sort of thing."
Financial author Martin Hawes. Photo / Supplied
Hawes says investing in a managed fund or a fund managed for you means a retiree can draw down a steady amount to buy the groceries as part of that amount is capital and part is returns.
"With a rental property you are only able to draw the cash returns - the rental returns. It's not easy to draw on the capital."
How much to draw out?
When it comes to working out how much to draw down Hawes says a good starting point is the 4 per cent recommendation made by the New Zealand Society of Actuaries.
Drawing down 4 per cent of your total investment is designed to make the money last for 30 years.
But Hawes says some could draw higher amounts if they take their own circumstances into account.
"You've got to think about your longevity, how you will be investing and investment returns and inflation."
At a 5 per cent rate a person with $500,000 would draw around $25,000 a year.
"It is very tricky and I have got a huge amount of sympathy for people who have saved and have KiwiSaver and maybe had some rental property and now they have got to negotiate their way through it."
