With Baby Boomers retiring en masse, financial planning expert Martin Hawes has seen a lot of change in the way people approach retirement savings.
In his new book, Cracking Open the Nest Egg, he examines how New Zealanders can make their retirement savings last the distance.
Photo: Martin Hawes
Hawes is a well-known purveyor of financial advice, he’s written more than 20 books, and he’s been involved with advice in KiwiSaver scheme investments and charities.
There's a lot of information out there to help people plan for their retirement, but Hawes believes there's very little out there on decumulation - or figuring out how to make your money work once you get there.
De-cumulating - opposite to accumulating capital - has become more difficult because of low interest rates, dicey investment returns, higher inflation, and people living for longer, he says.
"So, there's a whole matrix of issues that you've got to keep an eye on to make sure the money lasts as long as you do," Hawes says.
"Most people now are not just living on investment returns, they're living on investment returns and drawing on their capital, so their capital is reducing."
While he has based his latest book on advice for a mortgage-free person with savings of up to $500,000, he acknowledges that that won't be the average person.
But Hawes tells Jim Mora those who invest shouldn't give in to the temptation to hoard money.
"The figures show very clearly that as you move into retirement, as you get older, your expenditure drops and it does that almost inevitably, almost without you thinking about it, because you just can't do as much as you could.
"So that means a lot of people are left with a lot more money at the end of their lives than what they ever hoped for.
"Expenditure, and therefore your income, your drawings from a portfolio, should be higher at the beginning. It'll drop off as it goes on, it may spike a little bit towards the end as you go into care, but I'd really encourage people to relax a bit, the money is likely to last as long as you do and to spend more at the beginning of retirement."
You could apply the 4 percent rule, he says, in which you withdraw 4 percent from a balanced portfolio investment and increase that by a bit each year to keep up with inflation.
"The 4 percent rule basically says that if you draw 4 percent from a balanced portfolio, the money will last about 30 years. Maybe even 5 [percent] now."
How to invest for retirement savings
Hawes also favours managed funds rather than swatting up shares yourself.
"Those who have up to say $200,000 are probably better just to go straight into managed funds.
"Those who have got more than that ... they're probably best with a managed account, that is they go to a financial advisor and that financial advisor manages their money for them.
"There are a group who are DIY but I think it's almost a full-time job. Look I know quite a lot about money, I know quite a lot about investment, I know how this all works but I've got my money mostly in a managed account ... and the rest of it is largely in managed funds."
He believes keeping a cash reserve is better than the uncertainty of bank accounts that offer a low interest rate while submitting you for seemingly lucrative draws with prizes.
"I mean these won't be magic and pay high returns, they'll be paying the same returns over a population, but a little bit light bonus bonds really. I prefer the certainty such as it is, 2 percent, rather than getting 20 percent or zero percent."
If you concentrate all your wealth into one asset class, like buying a rental property for retirement income, you'll be giving up other opportunities and risk going south without back-up, he says.
"In retirement, I think retirees should have offshore investments, there are great opportunities there and there have been some very good returns from bits of global markets.
"But also it means you get your money outside of New Zealand so if something really bad happened to New Zealand - think of a major biosecurity breach, foot and mouth disease, something like that - having money off shore would mean that you could carry on with your lifestyle.
"The other thing is I'd come right back to this decumulation idea - that you are likely to live on not just returns on investments but the investments themselves and with a rental property, you can't break it down to small pieces, you can't draw a part of it out at the moment."
A good example is Amazon, he says, which at one point was listed for $1.50 a share and now that has gone up over $3000 a share.
"I'm not saying everybody is out looking for the next Amazon, what I'm not saying is that's easy to do, but I like to get exposed to technology and particularly clean tech, what we we're doing in technology for global warming and climate change, but also things like medical devices and biotechnology."
A rough rule of thumb to bear in mind is your percentage of growth assets varies with your age, he says.
"A 20-year-old would have 80 percent in growth assets and 20 percent in fixed interest and cash, whereas an 80-year-old would have 20 percent in shares and property and 80 percent in fixed interest and cash.
"You're much better to go online, Sorted has one, and go to a risk calculator and fill in a little questionnaire ... and that will tell you your - it's called asset allocation in jargon - percentage of growth assets against your percentage of income assets."
It's arguably harder than it's ever been to have a regular retirement income, with figures showing the average age of retirement is now 69.8 years.
"It's going to be made harder because we've put up the price of housing in this country so far that even owning a house ... is probably aspirational now for a lot of people," Hawes says.
"And getting that smooth income that they've had for 40 years while they've been in work, while they're in 25 years of retirement ... [and while being] exposed to financial markets is really difficult."
For those who are trying to save for retirement while young, his advice is to be patient.
"Thirty odd years before retirement, that's a very long period of time and the investment returns that you won't get steadily over those years but you will get at times and that means you will go forward at a leap and then sit still for several years.
"And you might think while you're sitting still for several years, that 'this is just too difficult, I can't do this', but you've got to be in the market, you've got to be investing to win and every now and again there'll be one of these great leaps forward that will make it suddenly seem much more bearable. So, it happens suddenly, but it happens slowly at the same time."
