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<hr class="displayNone"> <!-- First Image Width= 160 --> Mary Holm: Early retirement a feasible option
4:00AM Saturday Dec 06, 2008
By Mary Holm
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Mary Holm
Q: I am 60, my wife is 62. We have a home in Auckland and a holiday home down at the beach. Recently we have been thinking of getting out of the rat-race, selling up and retiring to a life of bowls, fishing and gardening. We figure that if we start now, as long as we stay healthy, we can live comfortably and extend our retirement by five years.
We calculate that if we sold our house and paid off the mortgage on the beach house, we could move there with about $600,000 to invest.
We are conservative so we would place most of it on term deposit in the bank, providing a return of about $24,000 a year after tax.
We think we could enjoy a comfortable lifestyle on about $36,000 a year, so we would top up our investment income by reducing our capital by $12,000 a year.
In three years time, our capital would still be over $560,000, and then my wife would start receiving her NZ Super and our capital could be preserved from then on. Two years later I too will receive my super at which time the household income would be over $45,000 a year after tax.
My questions are these:
* Is my arithmetic reasonably accurate?
* Does $36,000 a year after tax seem enough for two ageing baby boomers (we have no great ambitions to travel or own flash cars, etc)?
* Accepting that interest rates could shrink, in which case our capital could diminish to a greater degree, have we overlooked anything in our calculations?
* Are there other low-risk investment options we could consider?
A: Good on you for deciding when enough is enough. Your idea sounds wonderful _ and feasible. And you might even extend your retirement by more than five years, by reducing stress.
I'll answer each of your questions with a bullet point:
* Some people will say you should allow for inflation. However, while medical spending might grow as you get older, other spending tends to decrease. I've heard retired people say that _ as long as inflation doesn't get out of hand _ they can cope on the same amount year after year, even though inflation reduces how much it will buy. Beyond that, your arithmetic looks pretty good.
Some couples can both receive a NZ Super payment when one person qualifies and the other doesn't, but only if the couple's non-NZ Super income is less than a cut-off figure.
The cut-off is currently $21,874 a year, but it generally rises yearly, so you might qualify by the time your wife is 65 _ especially if interest rates plummet. Note, though, that if your non-Super income is near the cut-off the extra you'll get as a couple wouldn't amount to much. For more info, see www.workandincome.govt.nz or ring 0800 552 002.
* Only you can tell if $36,000 is enough for you. Research has shown _ rather surprisingly _ that many New Zealanders who currently get by on little more than NZ Super say they have sufficient money. But in any case I suggest you plan to spend more when you want to, gradually eating up at least part of your $600,000 in capital. Why shouldn't you? If you have children or others you would like to leave money to, they can have the beach house.
Go to the Retirement Commission's www.sorted.org.nz, read their ``Sorted 60plus' section and play around with their ``Managing your nest egg' calculator.
There are several scenarios, including spending no capital and spending the lot. You should read the ``Pete Brown and June Smith' case study on the website, which helps you understand how the numbers are adjusted for inflation and so on.
* Interest rates could indeed shrink, although promised tax cuts might counter that a bit. Over the long haul, though, who knows what interest or tax changes there will be? Also, inflation could speed up. And, for that matter, NZ Super could be reduced _ although I doubt by much for those already retired. Nonetheless, if you plan to eat up only part of your capital, you'll have a buffer, and can spend more if you need to.
* The Sorted website tells us that a man of 60 can expect to live 21 more years, and a woman of 62 can expect 23 more years _ although you can adjust those numbers. That means you'll be expecting to spend some of your money more than a decade from now. I would therefore suggest you invest some in a share fund, despite the riskiness, because it's highly likely to grow more than term deposits over 10 years or more. Can't cope with volatility? You could try a balanced fund, partly in shares and partly in less risky high-quality bonds. Or, if you must, a straight high-quality bond fund. It will be somewhat riskier than term deposits, and will usually give somewhat higher returns.
Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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