Above all else, retirement should be a time to be free of financial stress – something that was thrown into disarray for many older Kiwi workers courtesy of the GFC. Researchpublished by FINSIA in 2010 found that prior to the GFC, 54%of working New Zealanders expected to be retired by age 65 years, but post the GFC this figure dropped to just 37% of working New Zealanders. Some of those workers may now be considering retirement in the fairly near future so – what do they need to think about before taking the plunge?
Michael Burton is National Head of Wealth for private advisory firm Lachlan Partners and has approximately 35 years experience in financial services. He suggests the following checklist for would-be retirees.
- Have a plan as to what you will do when you retire. Retirement is for the rest of your life so it’s important to look beyond the big European tour or the year around Australia and really think about what you intend to do in retirement on an ongoing basis. Having a plan of action will help to determine your financial requirements.
- Understand what a budget is and work to it. While a budget is recommended at any age and stage of life, it is particularly important once you retire as your nest egg is finite. “If retirees try to live a champagne lifestyle on a beer budget, they risk suddenly having the odd unplanned expense and finding that they have drawn far in excess of the amount their capital base allows,’ says Mr Burton. So have a budget and stick to it.
- Plan for expenditure on capital items. Homes , cars and other belongings age, along with their owners. Whether it’s a new refrigerator, a new roof or a new car, ensure that your budget allows for periodic capital expenditures as the years go by.
- Discharge debts before you retire. Retirement is not a time to have debts – not even investment debts as the tax deductions are likely to be minimal.
- Consider whether you want to leave an estate to your children. “Older clients nearly always have the objective to leave a financial estate for their children,” says Mr Burton. “This is to their own financial disadvantage though.”
- Build a gym membership into your budget. A healthy body will help to retain a healthy mind – and also hopefully avoid any sharp rise in medical expenses!
- Cover your children’s ‘risk’ so that any health or family issue does not have them back on your doorstep. “I have seen clients retirement funds completely eroded from children returning to the fold after a marriage breakup, a serious health problem or where a child has gone bankrupt,” says Mr Burton. “It can be financially devastating.” Retirees should seek legal advice on asset protection.
- Load up your super funds for tax effective income. Under current legislation, when superannuation enters the drawdown phase both the earnings within the fund and the withdrawals from the fund (for the most part) are tax free. You should obtain professional advice on using your superannuation investment to your best advantage both before and during retirement.
- Understand your social security entitlements. The eligibility requirements for the various aspects of social security can be complex and depending on your personal situation you may be eligible for one of more benefits. The Ministry of Social Development has excellent online information and you can download the Services for Seniors brochure here.
Every stage of life comes with fantastic experiential gifts – including retirement. Ensure that you plan ahead to make the most of it.