Get your money’s worth in retirement
RThe longer you leave change, the harder it becomes.
etirement is not like it used to be. People are living longer, investment returns are lower and there is much more uncertainty in the world in just about every sphere you can think of.
New strategies are called for to deal with these changes. Retirement should be the best stage of life – a time when you can enjoy life to the max, free of worry. However, many retirees make mistakes with managing their money which mean they aren’t able to achieve the kind of retirement they deserve.
A 65-year-old can now on average expect to live to around 90 and many will live longer than this. If you want the last 30 or so years to be the most extraordinary time of your life, here are the key mistakes to avoid.
1. Failure to plan. You can choose to be free and easy and go with the flow in your retirement or you can choose to get a lot more out of your retirement by setting some goals and making plans to achieve them. Time goes very quickly in retirement – just ask any retiree.
That trip to Europe that you keep postponing may never happen if your health suddenly takes a turn for the worse. It’s hard to make a plan for the next 30 years but it’s quite easy to make a plan for the next five years. This is really important for the first stage of retirement when you want to do as many things as possible that rely on good health and fitness.
It’s also important to think about the last stage of retirement and where you might be living. Do you plan to move to a smaller home or a different location? Do you intend to move to a retirement village? The timing of these changes can be very important. The longer you leave change, the harder it becomes. Many retirement villages have long waiting lists and failure to plan ahead might reduce your options.
2. Having too much money in property. The term ‘‘asset rich and cash poor’’ comes from having too much of your wealth tied up in assets which are not liquid, that is, which cannot easily be converted into cold, hard cash. It’s great to have a beautiful home to live in when you retire, but if you have no money in the bank or other investments, you might find yourself unable to do anything but sit in your beautiful home looking out the window.
Try to have at least half the value of your home in other investments to avoid being asset rich and cash poor. This might mean working longer before your retire, or selling your home and moving to a cheaper location. It’s just a question of getting the right balance between a nice home and nice lifestyle.
3. Investing too conservatively. The common wisdom is that retired investors need to invest their money conservatively with low risk and hence a low return. Investing all your money conservatively for 20 to 30 years is a good way to run out of money more quickly than you need to. Investment strategies should be linked to your investment timeframe – that is, the timeframe in which you wish to spend your investment capital (not the income from the capital).
Unless you plan to spend all your money in the first few years of retirement, you should have different investment strategies for money you plan to spend in the short term (the next five years), medium term (five to ten years from now) and long term (ten years or more from now). This allows you to invest part of your money for the long term in growth assets that have a higher rate of return to help keep you ahead of inflation and tax.
4. Living off investment income and not capital. When you have spent a lifetime working towards building up funds for retirement, it is hard to watch them go down in value. In times gone by, it was common for parents to leave houses, farms and businesses to children to preserve family wealth. These days, with people living longer and low investment returns, it is increasingly difficult to eke out a living in retirement just by using the income from investments.
Investing for income is also likely to lead to lower returns and less tax efficiency. The truth is that money has value only when it is spent, and if you don’t spend your money, your children certainly will.
The uncertainties and anxieties of managing money combined with the lack of planning mean that many retirees underspend during their retirement. That is, they die with more money invested than they needed to have at that time. The purpose of money is to help you enjoy life, so make sure you get your money’s worth by avoiding these common mistakes.
❚ Liz Koh is an authorised financial adviser and author of Your Money Personality: Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273
847.