Retirement planning includes juggling uncertainties; interest rates shift, stock prices going up and down, and the media adding fuel to the flame, speculating on what could go wrong. Not to mention the fact you have no idea what will happen in terms of inflation, how long you are going to live, and how much your earnings will be worth in the future. To help you navigate the challenges and prepare for your retirement effectively, here are ten important rules to follow.
- Plan to be debt-free in retirement
Protecting your net worth and living off the dividends, when you still have to pay fees for borrowing money, is complicated. Therefore, you should pay down your debt as soon as you can. No one enjoys the thought of bearing heavy debt in retirement, but the closer you get to retirement age, the heavier your debt load can become. This is something one should keep in mind long before reaching retirement.
Paying interest on your debt is usually not tax efficient during retirement since you will receive taxable investment income. However, if you choose to put all your earnings into shares and property, then you might receive a net income above the amount you spend on paying off your debt. This option is rather risky but it is worth considering nevertheless.
Of course, you do not have to retire debt-free, but it’s a wise idea to downsize what you owe before you quit working.
You could plan to retire free of debt using the following tips:
● Maintain debt at a minimum. A retirement in which your money is dedicated solely to your desires and priorities (instead of to your liabilities) is good. Keep working diligently on paying off the debts while you still have a regular job.
● Find alternatives. If you can’t raise enough funds for debt payments, look for opportunities to earn additional cash.
● Extend your active years. Consider working a few years past the retirement age, as it may have considerable benefits for your financial situation during retirement.
● Re-examine your budget. Take a closer look at your present spending habits and see if they could be altered to facilitate more savings. Eliminate or cut back on expenses that can be done without or changed to a cheaper option.
- Work out how much savings you need
Ask someone who has already retired, and they’ll tell you to start saving for retirement as soon as you can! Even if it appears a long time away, it helps to commence the retirement preparations as early as possible. How much you need to save depends on your circumstances, but it is always wise to get a head start. While NZ Super (government pension) will help you get through, it’s your personal investments that will make retirement enjoyable and relaxing.
Responding to the following key questions will help you find out how much funds you will need in retirement:
● How long will I be retired?
There is no official ‘retirement age’ in New Zealand. However, those who have reached the age of 65 become eligible for NZ Super, so many people try to retire around that age. At the same time, more and more people nowadays work either full- or part-time past 65.
Consider your circumstances and calculate the approximate length of your retirement so you can make the necessary financial arrangements. You need to invest or ensure another income option that will last you for the whole period of retirement, so that you do not have to worry about running out of resources at the age of 80.
● What would my retirement living expenses be?
Some of your expenses may go up, for example, healthcare cost, while others will go down (such as school, clothes, accommodation, or work-related travel). Your children (if you have any), are likely to be independent financially by the time you retire.
What you ought to consider are your retirement ambitions. Whether you wish to visit new places, become a member of social clubs, or go out for dinner and shows regularly. Figure out if you will live in a rented apartment or your own home. If you rent, you’re going to need more cash to offset the expense; on the other hand, you’re not going to have money invested into a house.
Owning the home you live in, debt-free, however, eliminates the chance of rent increase or being forced to find a new place to live. If you live in your own house, you will have greater leverage over your finances but you will spend money on repairs, insurance, and other maintenance costs.
● What about the Kiwisaver?
The voluntary saving initiative was created to assist New Zealanders to conserve much-needed savings funds. But though you know it does work, many Kiwis seem to disregard it or end up throwing it into the ‘soon-to-do’ list and never get around to opening an account.
- Retire from paid work only when you are ready
For many, early retirement is a target – extra time for travelling, being around family more, or pursuing hobbies. Early retirement sounds good but is always very different in reality.
You may want to think hard before you plan to retire early, because:
- You’ve got to save a lot of your income. The sooner you save enough, the sooner you can retire. Early retirement means you have limited time for saving.
- You receive NZ Super when you are 65 years old. If you are considering early retirement, you will be the only one responsible for your income without help from the government.
- Annuities should not be purchased in the 50s. An annuity is a means of converting a fixed amount of money into a lifelong pension (which means you won’t run out of funds when you retire).
- It is difficult to get your KiwiSaver contributions paid out before age 65. Only if you can give proof that you are experiencing severe financial distress can you withdraw any of your money from KiwiSaver.
- If you’re paying off a mortgage, you won’t have much time. You will have limited time to pay off your house debt before you retire, which means you will have to work much harder to earn the money.
- Don’t spend too much too soon
Most people find it difficult to shift their mindset from earning a regular salary to relying on returns from a large investment. However, don’t be tempted by having a considerable amount in your bank and SuperLife accounts and thinking that you can spend a lot in one moment. Your retirement savings will have to last for several years – maybe until you’re 100 years old, so you must control your expenses
The following are some reasons why you should spend wisely in retirement:
- Your necessary and discretionary expenditures are going to evolve. Your retirement is bound to bring changes into your life. Most recent retirees spend much on vacations, sports, and family time – which means greater discretionary spending costs than when you were employed.
- Your risk tolerance will adjust. Risk tolerance applies to the level of risk you are comfortable taking to gain a certain return on investment. Find a consultant who is familiar with the trends of retirement expenditures and will help you develop a spending strategy that can safely take you throughout retirement.
- Costs of healthcare increase. Research shows that healthcare expenditures rise as you age. Since healthcare is one of the biggest retirement liabilities, consider assigning a portion of your gross income to your health savings fund. If you have sufficient reserves, you could allocate these funds to support expenses on healthcare.
- Plan for the possibility of living longer than average
If you are 65-years-old and male, then you have a 43% probability of living up to 85 years. If you are female, the probability is 57%. The golden standard is to prepare for 25-30 years in retirement.
While a later retirement allows more opportunities for jobs and other interests, early retirement is better for reaching life goals, such as travelling or pursuing a new hobby. Many who wait too long may realise they are running out of money or good health to make their dreams come true.
If you live a long life, healthcare expenses might be taking up funds, and conventional savings plans may not work as well as you had hoped. Remember that some people live longer than 90 years and are still energetic at that age.
- Prepare for the impact of inflation
The cost of what you buy doubles after 14 years at 5% inflation a year. What you can buy for $100 today may cost $200 in 14 years. As retirement can last for 30 years, your necessary costs will double and then double some more. Pension plans that neglect inflation and reduction in buying power will cause problems as the years go by.
Here are six approaches to help secure your retirement savings plan and conquer inflation:
- Ensure you purchase annuities. Note that annuities are agreements, not shares. Instead of being adjusted by inflation, annuities are expected rises to set sums.
- Consider safe investments. “Safe investments” are bonds with certificates of deposit (CDs).
- Continue working. If you continue working past your age of retirement, you can receive both wages and benefits. This will help you financially in your retirement years since your retirement income and future benefits will depend on a higher overall final salary due to a few more years of work.
- Defer social security. Although social security benefits are shielded by inflation, waiting would earn you a bigger check later, which is still covered in inflation.
- Continue investing in stocks. Continually investing in equity assets will help keep your investment funds up to inflation. There’s no certainty that the stocks will outpace inflation, but traditionally “safe stocks” do well over long periods.
- Have real estate. Property ownership is another way to keep up with inflation — perhaps even outplay it! Retirees can aspire to get their own house paid off, but investment in real estate will diversify sources of income to help fight inflation when you are retired.
- Make Your health a priority
For some people, the cost of healthcare is larger in pre-retirement years. Soon-to-be retirees must make an effort to understand and plan for the increasing cost of medical treatment.
Understanding the cost and having a plan to fill in the gaps effectively is essential. The expenses will be less challenging if you divide them into monthly costs and plan for them in advance.
For some, the public health system will fully accommodate their needs, but most will like the convenience of ensuring that they have funds put aside or medical insurance to cover the cost of private medical insurance.
Healthcare expenses will potentially make up a large share of your retirement plan. Estimating those costs and developing an expenditure plan will help protect some of the retirement savings and allocate them for other spendings.
A Community Services card can assist in covering healthcare expenses. If you apply, you’ll spend less on certain medications and health services. If you register for a Community Services card while receiving Superannuation, you will get a new combined Super Gold Card that will say “CSC” on the back.
- Don’t try to avoid all market risk (but don’t be seduced by promised high returns either)
Remember the basic principles of invested capital. How you save can be as relevant as how much you end up saving. Inflation and the kind of investments you make play crucial roles in how much you gain before you retire. Understand how to invest your savings and create a pension plan. Think about the investment opportunities for your portfolio and ask questions. Put savings into various types of investments — this way, you can reduce risk and increase performance through diversification. Based on a variety of considerations, such as your age, priorities, and financial circumstances, your investment choices will vary significantly.
Many investments look enticing because they produce good returns. Be mindful of spending on the grounds of high past returns or high expected returns. Note, the higher the returns, the higher the risk. It is also necessary not to entirely avoid the risk involved with investments such as shares.
It is better to have the required degree of exposure to certain investment needs and interests you prefer and to handle the associated risk.
We believe the “bucket” strategy is the best way to handle the savings plan in retirement. In this strategy, you commit funds to shares and assets, but only to an extent that you do not intend to use for the next 10 to 12 years, and only minimize risk as you get nearer to using the money.
- Get a financial adviser
Upon retirement, you will need as much sound advice as before. You’ll invest and earn more efficiently with a financial advisor.
Since certified advisors are prepared to work with various personal financial issues, they will assist you in setting financial goals and expectations and then suggest concrete measures to achieve them. This means they will guide you on how to divide your savings, what type of insurance you need, and how such actions will affect your taxes or property.
Managing capital can be difficult — not every one of us has the expertise to figure out the more complex aspects. That’s when it’s necessary to meet with professionals and get some guidance regarding money.
A professional adviser is often a tremendous help with regular budgeting or financial guidance. It is up to you then to decide whether to take the advice. A good advisor would also consider consulting with trusts and estates solicitors when you need more professional support, such as, when you need to secure assets in a family business.
- Plan for a healthy, wealthy and happy retirement
Most people retire without a plan on how to enjoy living and how to manage their savings to produce an income.
If you want to enjoy this portion of your life, stay active, and do what you love, ensuring that you have the money and resources to secure all this is essential.
If you have grandkids, spending enjoyable playtime with them will help you stay healthy. Moreover, make an effort to keep up with friends — it will also contribute to your mental health.
Active pastime does not have to mean climbing a tree, but you can play games or go out together with your pals. It seems clear but remembering to involve family members — mainly spouses — in your retirement planning is important.
The perfect retirement plan covers not only the income but also opportunities to remain healthy emotionally and physically. Gardening, hiking, visiting a gym, and eating healthy are all established ways of remaining healthy physically. Staying alive, fulfilling a purpose, and continually challenging yourself are perfect ways to improve your mental health.
Sometimes the easiest way to prepare for your retirement is to imagine your future. Think about the specifics of who you are going to become, where you’ll be, and why you’ll be there. Perhaps the most important part of preparation is being able to envision now who you will be in the future, and what your expectations and aspirations will be at that time.
In conclusion
Retirement planning is the most crucial component of your investment plan, no matter how much you have saved or will save. The fundamental questions that investors need to address are how much you will possess and how far it will last. For some of us, there will be NZ Superannuation, for others, it could be a little less straightforward because not all of us will be capable of surviving on NZ Superannuation alone.
Like other aspects of life, a bit of preparation ahead of time would help allow you to meet your own goals for retirement. While beginning or making adjustments to your plan is never too late, the sooner you begin the greater the chances of enjoying the retirement lifestyle you like to see. Like they say, to be forewarned is to be forearmed!
Frequently Asked Questions
How do I cope if I have a health setback?
Lots of new research shows you are who you think you are. It turns out the power of constructive thought is real. The American Medical Association Journal estimates that people with an optimistic attitude for themselves and their lives are 44% more likely to recover from a disability than those with a pessimistic perspective.
How can I minimize the cost of retirement housing?
Some strategies for lowering retirement housing rates include:
- Homesharing — cutting the cost of living with relatives.
- Downsizing — the most efficient way to leverage your home equity can be to downsize.
- Having a reverse mortgage (a reverse mortgage has both pros and cons).
- Move to a location that is comfortable for retirees.
- Selling your house to move or live abroad — here’s a list of the best places to retire around the world.
- Exploring senior housing options — there are many different retirement homes available.
What are the main benefits of retirement plans?
A retirement plan can provide you with several benefits:
- Potential growth in your return on investment that is tax withheld before you consider withdrawal or distribution.
- Deterioration of your income tax bill — today or in the future (whenever retirement funds are being withdrawn).
Why is it important to start a retirement plan early?
It’s never too early to start investing when it comes to pension plans. The more you spend and the sooner you start, the greater the opportunity to increase your retirement savings. You will be able to take advantage of the cumulative earnings by starting to invest earlier and remaining active in your financial affairs.
