The last few years before retirement are an opportunity to put strategies in place that will help your resources last the distance.
Liz Koh is a financial planner specialising in retirement planning, and director of Enrich Retirement.
OPINION: Approaching retirement is both exciting and scary. It’s exciting because there is a whole new way of life ahead with the freedom to choose how time and money is spent, but scary because of the uncertainty of how to avoid running out of money.
The last few years before retirement are an opportunity to put investment strategies in place that will help your available resources last the distance.
Retirement is not a very useful word to describe the transition to the next stage of life. The reality is that a very large percentage of people continue to work at least some hours each week after they become eligible for NZ Superannuation. This can be either by choice or necessity. When we talk about investment strategies for retirement, it is best to define retirement as that stage when you are reliant on your own financial resources to top up your pension income.
The most important point to keep in mind is that investment strategies for growing your retirement nest egg are very different from the strategies needed for generating an income once you are retired. The years before retirement are a transition stage where it helps to start repositioning your investments to achieve different goals.
Prior to retirement, the focus is on building as much wealth as possible but with an acceptable level of risk. This means the emphasis in a pre-retirement investment portfolio (including KiwiSaver) is on growth assets such as property and shares. These asset classes will provide the highest return after tax over the long term. While they are riskier due to their volatility, risk can be minimised through diversification (spreading your money over many different individual investments) and staying invested over the long term, through all the ups and downs.
After retirement, the goal is not to build wealth, but to consume wealth. As most retirees will tell you, NZ Superannuation is simply not enough to support a comfortable retirement lifestyle and so personal financial resources are needed to top up fortnightly income and to cover large one-off expenses such as travel, new cars, home maintenance and health costs. A post-retirement investment strategy has the goal of making sure money is available to you when you need it. The investment time frame, that is the period of time between now and when you need the money, will determine how the money is invested. Post retirement, asset classes such as cash and bonds which provide income and stability will play a bigger role in your portfolio.
In the years just prior to retirement, a balancing act is required between the competing goals of continuing to build wealth while ensuring that money will be available for spending in the early retirement years. Good planning is needed to achieve this balance. Here is a suggested approach:
- Make it a priority to get rid of any debt as quickly as possible (mortgage, credit cards and other short-term debt)
- Estimate how much money you will need in addition to your pension to cover your expenses for the first five years of your retirement.
- Start building up reserves in more conservative investments such as term deposits to cover that early retirement period while at the same time continuing to build up your growth portfolio for your longer term needs.
- As you get very close to retirement, consider switching from a growth portfolio to a balanced portfolio to complement your term deposits. Always get advice before making such a change.
Keith Simmonds, 93, has earned the right to enjoy his retirement, but instead he’s counting his pennies as the cost of living continues to balloon.
A key question to ask is where KiwiSaver fits in to your strategy. You can remain invested in KiwiSaver during your retirement years and it can be your principal portfolio. A disadvantage of KiwiSaver is that it cannot be held in joint ownership or owned by a family trust. Prior to retirement, you should continue to contribute enough into your KiwiSaver to be eligible for the maximum tax credit and employer contributions, however you may wish to make additional savings into a different portfolio arranged through your financial adviser.
In the last few years before retirement, try living on a smaller budget which will be more in line with your post retirement income. That way, you will find the transition to your new income much easier, and the money you save can be added to your retirement portfolio.
The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge from www.enrichretirement.com.