Understanding your position and designing a solution to suit
One of the key factors that you will need to consider is how to transition from the workforce into retirement, whilst maintaining your lifestyle. Passive investment income will play a big part in this transition.
You may continue to work part time, or even full time. You may wish to make the most of your early retirement years by travelling, buying a boat, or upgrading the house. All of these decisions will have a financial impact.
This means that is it essential to project your income requirements during retirement. It is important to assess where the different components of income will come from, and how you will meet your lifestyle goals, whilst maintaining financial freedom.
At the base level is NZ Super. Your level of income above NZ Super depends on how you have equipped yourself for retirement.
Another consideration is the balance between risk and return. This equation has been skewed somewhat by the current low interest rate environment. The lower interest rates have forced many retirees to reconsider their asset mix, as term deposit rates are no longer as attractive.
This is an effective 60% pay cut for investors. Investors who were receiving approximately 8% on their 1 year bank term deposits in 2007 are now only getting 3.1% – 3.4%. That’s an effective drop in annual income of 59.4% from what they were receiving ten years ago. Or, to put it another way, it would be like a wage earner going from earning $60,000 p.a. to now only earning $24,000 p.a.
The right balance between risk and return is essential. The conundrum retirees face is explored in more detail here.
These tools on the Sorted website can help you project your income requirements, discover your tolerance for risk, and calculate how much you are able to save. It’s preferable to do this well before retirement so you have a clear idea of the decisions you need to make to achieve your goals, but it is never too late to get started.
The middle to later years of retirement may be more about consolidation.
Traveling may become less important, and the need for income may abate. Many will start to become more conservative with their investments in these years, looking to consolidate.
The need for investment returns still exist however, as having some excess funds will be essential should an unexpected healthcare bill arise. Having some funds aside to help family is also something many of our clients enjoy.
The cost of living typically plateaus in this period, but you may be considering downsizing your home or thinking about the benefits of retirement villages. Releasing the equity tied up in the family home sometimes becomes a necessity as you may find yourself asset rich but cash poor.
Not having spare cash makes it harder to maintain the house and find money for the enjoyable things in life, like pampering the grandkids or going on another trip.
Information above sourced from the Commission for Financial Capability and Sorted.co.nz
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