Opinion & Analysis
OPINION: Retirement means a big change: In retirement you can no longer comfortably expect your salary to hit your bank account neatly every second Thursday. Instead, you have to find a way to get steady and reliable income from the invested capital you have.
The stakes are high - one big investment mistake means that you do not eat (not very well at any rate). Yes, you will still have NZ Super. But that is a fairly measly amount to live on. Most people are dependent on their investments for a part of their income in retirement.
Many people do not invest well for their retirement income. Either they blunder off into some poor investments (finance companies, Blue Chip or even a very high weighting to shares just before a crash), or they become mesmerised by risk and stay with low-yielding deposits. Either way leads to a poor retirement financially, with lower than expected income.
Not everyone can afford financial advice and there is no annuity market in New Zealand that people can access to purchase a steady income.
Put all of this together and the country can, therefore, look forward to more financial fiascos, failed investment funds and people with wrecked retirement dependent on family and/or the state.
Maybe there is a solution: That solution would be to make KiwiSaver funds less available on retirement, so that retirees can withdraw only small amounts as income.
At the moment, as soon as you hit retirement you can access all the money that you have in your KiwiSaver account, even though many do not have the skills to invest well enough to manage a lump sum for essential income.
KiwiSaver is supposed to be savings for retirement income but, on retirement, people can do anything they like with it: Blow the whole lot in the first six months of retirement or lose out to ill-conceived investments. Whatever the case, when it is gone they will probably fall back on the state for support.
Instead of this, I would propose that people can draw a lump sum on retirement (perhaps 20 per cent of the money that they have in the KiwiSaver account) and then can draw only a certain amount each year. This effectively drip feeds the money in the account out over the 20 or 30 years of retirement.
To make this work, some of the rules around KiwiSaver would need to change. First, KiwiSaver would need to be made compulsory. This is likely to happen anyway, but would be necessary as there would be some people who would not like the idea of being unable to access their savings in the scheme as a lump sum. In any event, compulsion would be necessary so that virtually everyone has some retirement income and does not rely on the state.
Second, a limited lump sum ought to be allowed on retirement. This may be to have an overseas holiday, to buy a boat or to do up the house. The amount of this lump sum could be around 20 per cent of total funds in KiwiSaver.
Third, all KiwiSaver accounts would have to convert to Conservative funds on retirement, so that they were diversified and low risk.
Fourth, retirees could withdraw an annual amount as income. Ultimately actuaries would work this out. But it may be that it would be around 5 per cent a year of the original amount that was in the KiwiSaver fund. This would mean that 25 years from the start of the retirement, at age 90, the funds would be gone.
There would be some who die earlier and the balance of their funds would pass to their estates.
The result is that on retirement for each $100,000 that you have in your KiwiSaver account, you could withdraw $20,000 immediately and use it how you will. From then on, you could withdraw annually for living costs, say, $5000 for each $100,000 of savings.
There are difficulties, of course: People who live longer than 25 years will find that their money runs out before they do. However, it seems to me that these difficulties are small compared to the problems caused by retiree investment losses we have seen in the past.
At the moment, KiwiSaver balances are quite small and relatively unimportant. However, that will change and without some kind of national plan, we will have more retirees in extreme hardship through making poor investment decisions.
Martin Hawes is an authorised financial adviser. A disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
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