By MARY HOLM
Q. As a 70-year-old who has "retired" after 40 years in the workforce and then started a new career in horticulture, I am contemplating retiring a second time - and this time for good.
My wife and I have worked hard and husbanded our resources over the years - apart from getting carried away with the sharemarket in the 1980s and getting modestly burned - and will on retirement have a reasonable nest-egg to see out our days.
Our problem relates to the allocation of our financial resources. How much do we allocate for day-to-day living?
Is there an equation, formula or table that will tell me how much capital I need to ring-fence from our savings to provide a tax-free income of, say, $40,000 per annum for the next five, 10, 20 years or whatever, with that capital conservatively netting, say, 3 per cent after tax and itself being eaten into and completely expended by the end of the chosen timeframe?
I have been through the Retirement Commission's calculators and visited our bank's retirement calculators, but nowhere is there a table that provides a comprehensive set of data with the variables of: duration, desired annual income, interest levels and capital lump sum required.
Once we have the answer to this problem then we can see how extravagant we can be when building our new house and generally spoiling ourselves with the remainder of our nest-egg.
Maybe you could steer me in the direction of such a table.
A. I'm all for anything that will free you up to get on with spoiling yourselves.
And I've found an internet calculator that should do the trick.
Go to www.interest.com/hugh/calc, scroll down and click on "Retirement Payout Calculator".
You need to fill in the amount of money you have, the interest rate you expect it to earn, the number of years you want payments and the inflation rate.
The calculator will then tell you your initial monthly payment.
While this calculator starts with the lump sum and gives you monthly income, if you want to go the other way, you can get your answer by trial and error.
Let's say you want $40,000 a year after tax - or $3333 a month - for 10 years, with your capital earning 3 per cent after tax. I've added 3 per cent for inflation, to be on the conservative side.
By trying different account balances, I came up with a lump sum of just under $390,000.
At first glance this seems high.
But don't forget the inflation factor. It means your payments increase 3 per cent each year so you need extra money upfront to cover that.
And especially over periods of more than a few years, it's really important to allow for inflation.
By the way, www.interest.com is an American website. That means much of the other info on it isn't very helpful for New Zealanders.
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Q. During the last three years many investment funds lost half or more of their capital value.
Some experts propound that no more than 2 per cent of your capital should be at risk on any trade; that you set a "sell" stop at the point where a loss in value of any purchase will reduce the trading fund by 2 per cent or less.
Are there any fund managers or equity funds that commit to this principle?
A. I don't know of any. And I wouldn't invest in one if I did.
"Stop losses" always look like a great idea. You set up a computer to alert you whenever a share you've invested in has fallen more than, say, 2 per cent, and sell it at that point. That way, you can't suffer any big losses.
The trouble is you can end up with many small losses, which might be worse.
The assumption behind "stop losses" is that because a share price has fallen, it's highly likely to fall again tomorrow.
But that's not true. A share price today represents the collective wisdom of the market about that share's value. If the market thought the share was more likely to fall than to rise tomorrow, the price would go down today.
In an efficient market, at any given time there should be a roughly equal number of people expecting a share's price to rise as to fall.
Before everyone writes to say sharemarkets are not always efficient, I'll acknowledge that. But inefficiency is no more likely to cause falling share prices to continue to fall than it is to cause falling prices to rise.
Logic says it will be random. There will be some of each, and no magic way for us to tell which is which.
What you do, then, when you set "stop losses" across a portfolio is to guarantee you will sell quite a few shares at a loss - many of which might well rally later on.
What's more, if you set the loss at a small number like 2 per cent, you will end up trading often. All share prices wobble around. Even the big winners take quite considerable dives on their way upwards.
And trading often means paying lots of brokerage.
If you use a bigger number, such as 10 per cent, you won't trade as often. But the losses you do take will be bigger.
All in all, it doesn't sound like a winner to me.
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Q. My experience with residential property may help investors with their decisions on the merit or otherwise of this type of investment.
Twenty-one years ago, my wife and I purchased a cottage at Henderson for investment purposes. Nine years ago, we built a second house on the property, and we have been active property managers.
Over the years, we also invested in managed funds, shares and an interest in a commercial property.
Now that I am employed as a financial adviser, I am in a position to really be able to assess the performance of respective investment options.
The outcome is that we sold the residential rental property at auction this year. Based on the gross auction price and the rents achieved from the two houses, the gross rental return was just under 10 per cent a year.
But the return on the capital, taking into account the capital investment in the two houses over the years, was about 5.5 per cent a year.
We have now invested the funds in accordance with a financial plan, with exposure to shares via a managed fund, commercial property and fixed-interest instruments.
I can see that as a passive investment, the returns will be superior to residential property, without the worries of dealing with tenants.
A. If I were you, I would say the returns will probably be superior. With any investment involving shares or any type of property, there can be no guarantees. Still, if you are talking long-term, you are probably right.
As far as your assessment goes, we shouldn't draw any definitive conclusions from one person's experience.
However, you are looking over a long period that included property booms and slumps, and that counts for something.
Also, your 21 years takes us back to a period of high inflation, when nominal (not adjusted-for-inflation) returns were higher on every investment.
If your entire investment period had been when inflation was low, as future periods are likely to be, your returns would probably be lower still.
Another thing: you've done a proper analysis.
A lot of people who look at property returns are inclined to overlook all the money they put into the investment over that period. They concentrate only on the purchase price.
At the very least, readers can get an idea of one possible outcome to investing in rental property: a mediocre return. So thanks for your contribution.
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