Article by Lynette Ball, Authorised Financial Adviser
Many of us dream about the day when we can be free from the 9 to 5 routine. A time when we can do the things that we really want to do, whatever they may be. Suddenly, the day arrives, and, after the office farewell, you retire. So, now what?
Many of us will have wisely planned and worked long and hard to create our financial freedom, and tools such as the Sorted website have helped us reduce debt and build up a decent fund over the years, while KiwiSaver plays its part by topping up savings.
Yet when we finally reach that milestone, we can find ourselves with a new challenge: how to generate an income during retirement. After many years of salary payments reassuringly appearing in our bank account, fortnightly or monthly, this can require a bit of adjustment.
For some, this challenge is further exacerbated by having a higher portion of their overall wealth being invested in the family home. If you’re in this situation, it may mean having to consider some steps to realise some capital to support your lifestyle through retirement.
Then, of course, there are other questions to think about. Although you may have achieved financial freedom, do you actually want to retire? That’s quite a fundamental question.
As a financial adviser, I often hear clients say: “I imagine that the hardest thing about retiring is having nothing to do”. After years of productivity, from school to university to work, a life of meetings and meeting deadlines, it’s easy to see why people become conditioned to a busy work routine. Adjusting to a different pace can be hard.
That’s why some professional people choose to gradually ‘phase’ themselves into retirement, by contracting to their previous employer or taking on a part-time role. It also allows them to delay making any decisions about generating an income.
But sooner or later, it’ll be time to make the call. So what choices do you have if you want to generate an income during retirement, and what are the pros and cons? Here’s a few ideas that spring to mind:
Invest in bank investments
This could include a combination of term deposits and on-call accounts so that you can have your funds in liquid cash to draw from to support yourself. The challenge with this approach is that current interest rates are low, and you will likely see the real spending power of your money go backwards when taking inflation into account.
A large amount of capital can be tied up in a rental property, and the main question to ask yourself is whether the rental property will generate sufficient income to support you during retirement.
Draw-down on capital
Some people need to draw on their capital to maintain their lifestyle. The challenge here is that if the investments are held in growth assets – shares and property – and there is a downturn in the market, you could find yourself realising at an expensive price to support your on-going income. Term deposits can also be a challenge if invested for a longer period with lock-in clauses.
A more strategic approach
Focus on having money available by matching the investment strategy with the timeframe in which cash is required. Funds which aren’t required immediately can be invested in a diversified portfolio such as cash, bonds, listed property, local and global equities, for a higher return. Funds for the short-term can be held in income assets for liquidity. The benefit of this is that it protects the real spending power of the lump sum.
And the strategic approach is my preferred option for the savvy investor who needs to create a regular income in retirement.
To me, the bottom line is to keep an open mind on all investment options. You may discover a better investment match to suit your income requirements. After all, it’s your retirement to enjoy the way you want. That’s the reality.
AdviceFirst Limited | A Disclosure Statement is available on request and free of charge.