Retirement planning: Single female, 50s

Retirement planning is daunting at the best of times. For a single female, it can be downright scary. In today's MoneyMakeover, Amanda Morrall looks at a woman in her 50s who plans on going it alone.

Abigail is a 52-year-old Christchurch divorcee bumping up against retirement. With less than 15 years to go before she plans on giving up work, Abigail wants to be as prepared as possible.

Although she has a partner, they keep separate residences and have no plan to intermingle the finances.

"I want to be in control of my own destiny," she says.

Abigail does not have any structures in place to protect her assets and that remains a concern to her.

She was earlier advised to set up a master trust with two empty trusts for inheritance for her children but was later told this would not be binding so did not pursue it.

Her goal is to have an "enjoyable lifestyle in retirement" as well as help her two grown children buy properties of their own. With a fulltime job, a home, several investments and no dependents, Abigail is in a good position to bulk up the retirement savings account.

With an ailing, elderly mother for whom she cares, Abigail rents her own home for extra income.

Her quandary is whether she would be better off selling her residence and buying two rental properties to maximise potential income streams.

She also wonders whether her investments (New Zealand and Australian shares, money in managed funds and a KiwiSaver account) are doing as well as they can be.

Her appetite for financial risk-taking has been assessed as high.

Finances

Here's how her situation breaks down:

Net income (including rent, dividends and interests on investments: : $55,000 a year

Expenses: $3560 a month

Assets: House: $495,000

Liabilities: Combined mortgages $176,335

Insurances: Home: $668 a year, home contents: $323, automobiles: $469, health: $527.68, life (death, illness and critical cover): $1162

Investments: Money Managers APS Growth Portfolio: $16,625, New Zealand shares: $43,248, Australian shares, $12,712, Gareth Morgan KiwiSaver $9000 and BNZ Future Life Plan $8000.

Expert opinion

Certified financial planners James Smith, of Bradley Nuttall in Christchurch, and Richard Harden, of Richard Harden Investment Services in Nelson, were consulted. Here are their respective recommendations for Abigail:

JAMES SMITH:

At first glance, Abigail's situation looks complicated.

There is certainly a lot going on in her life and many moving parts that need to be considered to develop an overall strategy. However, with some sensible planning and a little bit of luck, she still has every chance of putting herself in a sound financial position by retirement.

Rental property

Abigail is thinking of selling her main home and buying two rental properties. With a few caveats this idea has merit.

For example, if Abigail sells her home and repays all personal debt, she will have more than $300,000 remaining. Setting aside, say, $5000 as a cash reserve, $300,000 can be used to buy two rental properties.

If she places a limit on the value of both properties of $600,000, her borrowings will be no more than $300,000, or 50 per cent of the value of the properties.

All her borrowings will be tax-deductible and at a 7.5 per cent rate of interest, the rental income will be close to servicing the debt and repaying the mortgage over a 13-year time frame. That means that by the time she is 65, both properties could be debt-free.

If we assume the capital values increase at the rate of gross domestic product growth plus inflation (about the long-term average), the real return (after inflation) will be about 2.5 per cent a year. That means that the combined values (in today's terms) could be worth $825,000 in 13 years when she plans to retire.

There are, of course, risks with this strategy and by selling her home she will lose some independence.

She will also need to decide if she wants to become a landlord and there are some watering down of the tax benefits for rental properties on the horizon. However, on the positive side, she's in stable employment and provided the gearing is kept at sensible levels, she is well-positioned to meet any shortfall in rental income from her earnings to service the mortgages.

Investment portfolio

Abigail has a real hotchpotch of different investments, which total about $80,000. The managed funds are from very expensive providers, and the individual shares are exposing too much of her capital to stock-specific risk. Individually, I'm sure they all made sense at the time, but collectively, they just don't work well together.

She should consolidate them into a new portfolio which can provide her with a better spread of diversification, lower fees and improved returns. The investment portfolio together with the savings she is accumulating with KiwiSaver will also help to diversify her asset base by spreading her investments into assets other than just property.

Still, taken as a whole, the overall strategy I've outlined above is aggressive – more conservative clients might be better advised to use some of the investment assets to repay debt.

Estate planning

Before reorganising her investments, Abigail should seek legal advice on the implications of the Property Relationships Act regarding her situation and partner. She should also ask the lawyer to walk her through the advantages and disadvantages of setting up a trust.

Insurance arrangements

Finally, turning to her insurance arrangements, her level of life cover could be trimmed back bearing in mind she has more than $450,000 of life cover, her children are financially independent and net assets of more than $400,000. Abigail's greatest risk is losing her income through illness, so any savings should be channelled back into arranging an income protection policy. However, she has sensible levels of trauma cover and is a member of a group medical insurance policy that seems appropriate for her needs.

RICHARD HARDEN:

Abigail's in a good financial position and well done on her for taking charge of her finances and thinking about the future. She has goals and objectives and now is the time to put a plan together. There are a few areas that need some consideration.

Estate planning and risk management

Abigail has received some advice about estate planning and protecting her assets. This is particularly important when in a new relationship and she needs to continue discussions with her lawyer about protecting her assets.

Her insurances need to be reviewed with an independent adviser. As she is single with independent children, her life insurance needs have lessened.

Protecting her ability to work is crucial to achieving financial goals, therefore income protection and trauma cover may be more relevant.

Investments

She has given her investment planning some thought and has some diversification but there is more than 60 per cent invested in direct Australasian shares and no doubt further exposure with Money Managers, the BNZ Fund and Gareth Morgan's KiwiSaver Fund.

Overall, it is unstructured and for a smaller portfolio she is perhaps taking on too much risk with direct equities and overly exposed to one sector. Abigail needs to decide whether she wants to be a DIY investor or have most of her investments managed by an adviser.

A good adviser should be able to review her current investments and give appropriate advice and diversification bearing in mind her risk profile. The risk questionnaire has placed her in a fairly aggressive category but this requires further consideration.

She has good equity in her property but a substantial mortgage at more than $190,000. However, by renting her home, she has plenty of disposable income and this rent should be used for reducing debt.

Like many New Zealanders, she is considering rental properties. I suggest caution because this would probably mean taking on considerably more debt and she needs to do the sums carefully. Based on the home being worth $500,000, her current rent is giving a gross return of about 4 per cent which is hardly great, but she will get some capital gains over time. Bearing in mind her current position, I wouldn't be purchasing other rental properties, especially with the Government signalling tax changes in this sector.

Retirement plans

Well done to Abigail for joining KiwiSaver. This will help with her aims to retire at 65, but she needs to consider the level of income she will require. It is impossible to predict what New Zealand superannuation rates will be in 13 years but, say, optimistically, she gets $15,000 gross a year and requires a further $25,000 for 20 years.

In today's terms, she needs a lump sum of about $415,000. To achieve this amount, she will need to increase her savings by a further $740 a month, but should look at a flexible savings scheme.

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. No person or entity (including Bradley Nuttall Ltd, Richard Harden Investment Services and The Dominion Post) will be responsible or liable for any errors, omissions or inaccuracies in this article or liable to anyone for any loss, damage, injury or expense suffered or incurred as a result of reliance on the information provided and opinions expressed in the article. Disclosure documents for James Smith and Richard Harden are free and available on request.

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