Diversify and beat retirement cash blues

Dorothy, 59, is a lifestyle block owner from Lower Hutt who aims to stay on her land as long as possible and lead a simple country life. Mortgage-free, divorced with no children, Dorothy works part-time at a job she loves (in a veterinary office), and supplements her gross annual income of $12,000 with interest and dividends from investments she made after retiring from a 25-year career in banking.

Dorothy was living her dream but dark clouds started to gather in 2007. In two words: finance companies. In a classic case of too many eggs in one basket, Dorothy found herself facing financial ruin as her investments, one by one, fell into receivership or were frozen. She now finds herself watching her pennies and seized with worry about whether her retirement savings will be wiped out along with her dream of staying on the land.

Dorothy confesses she would rather die than move to the city and give up her lifestyle – such is the value she places on her property. "I just want to carry on living here – that's all I want. I've invested in finance companies for 25 years and it was never a problem and I was doing it for the higher interest rate. Now, I'm just sick with worry. I just want to get my money out. I'm hoping for a bit of peace of mind and a way through this."

To find out Dorothy's options, Money Makeover consulted Chris Wasley of Myles Wealth Management in Christchurch.

On paper, Dorothy's finances look okay. Her lifestyle block is worth an estimated $530,000. Including home contents, her car, ride-on mower and quad bike, her total assets are worth approximately $606,000.

She has an additional $250,0000 in investments but the bulk of it is tied up in finance company debentures. Her investment portfolio reads like a war memorial with money in Geneva Finance, Numeria Finance and Capital + Merchant Finance.

She has additional investments in finance companies United, Hanover and Lombard which, so far, remain intact.

But with both Numeria and Capital + Merchant in receivership and her Geneva funds frozen, Dorothy questions whether she will see any money returned let alone a profit.

She's not alone. In the past 18 months, 12 finance companies have failed, leaving New Zealand investors in the lurch for about $1.5 billion.

A staunch do-it-yourselfer, Dorothy says that to save money, she never sought any professional advice on her investments.

It is a decision she has come to regret. She now finds herself scrimping just to get by. Dorothy's spending is estimated at $3000 a month with her part-time net income just over $800 a month.

Until recently she used the interest from her finance company debentures to make up the shortfall.

She makes a little bit of cash on the side allowing cattle to graze on her land, and she raises and sells weaners. The revenue is modest but it is enough to cover expenses associated with running the lifestyle block.

Although she has seven hectares of land, Dorothy is adamant about not selling or subdividing. "It's my home," she says emotionally.

Mr Wasley offers Dorothy some comforting words and tells her not to write off all her money in the three finance companies that are in difficulty. She should expect to get some of her capital back but only time will tell her how much.

Dorothy is relieved to hear this. With regard to her money in the other finance companies, Mr Wasley says that she can only but wait until each one matures. In other words, there's not much point worrying about a situation she can't change.

"Overall, what we're saying with the finance companies is whether they're in receivership or not, there's nothing that can be done. All you can do is let time take its course.

"The bigger question we need to focus on is, can you still meet your lifestyle goals despite the fact you may suffer losses from some of these investments?"

Dorothy restates her wish to remain on her property as long as possible and says she is neither a big spender nor traveller so has no immediate call for large withdrawls on her investments.

Having had a few weeks to digest Dorothy's financial information and do some computer modelling, Mr Wasley relays some good news. He tells Dorothy that her dream of staying on her lifestyle block (barring unforeseen events) looks safe, even with the losses she will undoubtedly incur with the finance companies.

Given her current income, the $14,000 NZ Superannuation she will qualify for when she turns 65, two additional superannuation schemes worth $27,700 and her other investments, Dorothy's money should last till she turns at least 81, without her having to sell her lifestyle block, according to the computer projections That is predicated on several assumptions including: long-term historical average rates of return on investments; an average inflation rate; getting a conservative proportion of money back from the finance companies in receivership; and a full return from those not in receivership.

Although the financial forecast looks good, it is still possibly 10 years shy of Dorothy's stated goal of remaining on her property till age 90.

Providing she lives that long, and still wants to stay on her lifestyle block, Mr Wasley outlines three scenarios that could get her there.

* She could increase her working hours till 65.

* She could continue working part-time at her current hours until the age of 70. By earning more income from her job – which Dorothy has indicated she is happy to do – she won't have to draw much on her investments, which should then last her longer.

* She could try to generate a higher rate of return on her investments, therefore making her money last longer.

ANY ONE of these options, or a combination of them, should result in Dorothy's investments seeing her through to age 90, Mr Wasley says. Failing the above, there is a contingency plan.

As a last resort, he tells Dorothy she could sell part of her land, move to a cheaper property (thus freeing up more investment capital) or use an equity release scheme to draw money from the equity in her property.

For now, he tells Dorothy to sit tight till her present investments mature and then take it from there, ideally with a professional advising on an investment strategy.

Without disparaging finance companies, Mr Wasley tells Dorothy she would be wise to build a more balanced portfolio. "An effective portfolio is well diversified across different asset classes [cash, fixed interest, property and shares] and countries. It should also be tax efficient particularly with new tax rules on investments. And obviously you want an investment strategy that is appropriate for your spending requirements.

"That is to say, match the nature and term of an investment with the date when you are likely to need that money for spending purposes.

"With some realistic adjustments to your current lifestyle, with a more effective investment strategy and a disciplined approach to spending, you can meet your wishes of staying on the lifestyle property for the rest of your life despite the possible losses from some of the finance company investments," Mr Wasley informs Dorothy.

"I feel much better already," says Dorothy, adding that she's also bumped up her work hours.

* This article is intended as information only. Its contents are not intended to be a substitute for specific professional advice on investments, financial planning or any other matter.

Interested in a free Money Makeover? Write to Amanda Morall, PO Box 4722, Christchurch, or send an e-mail to Amanda.Morrall@press.co.nz.

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