New funds producing income during retirement designed to ease financial burdens.

The son looked at his elderly parents, in their late 80s, surprised by what he'd found in their bank accounts: "Dad," he said, "where's the money gone?"

His father shifted uncomfortably in his seat: "We didn't expect to be alive this long".

The family was a victim of an occurrence all too common in these days of advanced healthcare and longer lives – outliving their income. The parents, who downsized their home years ago, had asked their son to have a look at the family books, where he saw that they had been living off their capital and their pension. They hadn't led a profligate lifestyle but simply did not have enough money, other than their pension, to avoid draining their resources.

It's a scenario Christian Hawkesby, Executive Director and Head of Fixed Income and Economics for Harbour Asset Management, says can be found across New Zealand as more people head into retirement – even after the advent of, and money from, KiwiSaver.

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"KiwiSaver has done a good job – it's 10 years old and has $50 billion in funds but it was designed to accumulate savings, not to help people with the mechanics of drawing down savings in retirement."

Even with KiwiSaver and the pension, most Kiwis would need to supplement the pension with extra income, he says, and most think the capital gained from downsizing their home is all that is needed.

Not so, says Hawkesby, quoting New Zealand Financial Services Council (FSC) research of over 2200 people from late last year – pointing out that, on average, equity released by downsizing the family home was expected to last only three years.

Worse, most retirees would use up their total savings in just 10 years and rely solely on the state pension after that – with more than two-thirds of retirement-age New Zealanders feeling they do not have enough income to live comfortably.

"So what's needed is a post-retirement plan to generate income from the assets built up in KiwiSaver and elsewhere," says Hawkesby. "The FSC research shows we can't just rely on downsizing alone – most people downsize to something smaller but more modern. By the time you factor in shifting and transaction costs, people often don't have as much left as they thought.

"There's no plan at the end of KiwiSaver. Yes, you can take it all out and, yes, you can take a portion of it out but there are no safeguards to make sure people don't outlive an income.

"We are living longer than we used to – the most common age of death has risen over the last 20 years from 78 to 87 years. Through these later years of life, there is also growing incidence of cognitive decline like dementia and Alzheimer's, so it is important to plan early and make early decisions."

The FSC research showed retirees were generally short of about $218 a week to live comfortably (they thought they needed $655 a week to live comfortably but the research showed they had, on average, only $437 a week).

The age group most worried about the future was 35-44-year-olds – 63 per cent of whom were worried about their retirement, with 25 per cent "very worried".

One answer, says Hawkesby, is an Income Fund – a relatively new type of product that gives New Zealanders the opportunity to have a regular tax-paid income from a lump sum investment. Harbour Asset Management has $3.9bn funds under management, including $75m in the Harbour Income Fund launched in 2014.

Income Funds have become increasingly popular as investors have started to consider how best to invest in retirement in a world of low interest rates. These funds typically hold a diversified combination of corporate bonds, dividend yielding equities, listed property and infrastructure stocks.

The Harbour Income Fund makes a regular fixed distribution that equates to around 5 per cent per annum, which compares favourably with three-month term deposits (currently 2.5-3 per cent). The fund has been designed so returns generated are sufficient to enable this size distribution without eroding the capital value of the fund over the medium term.

"Let's say the investor wants to receive an income stream larger than 5 per cent per annum of their original investment," says Hawkesby. "To generate that amount of cash, investors would have to complement the distribution received by redeeming units in the fund – effectively selling down some of their holdings each period and spending their capital along the way.

"Whatever course an investor takes, the key to turning a nest egg into a reliable income stream that will see you through retirement is having a plan and acting early."