Retirement Saving

Financial planning tools

A number of doctors ask me what their Super and Kiwisaver will be worth at age 65. I am happy to calculate this for you so please let me know or use the calculators on the sorted website which is www.sorted.org.nz. There is also useful information about retirement planning on the commission for financial capability website which is www.cffc.org.nz.

A useful book to read is called “Being Mortal” by Atul Gawande. In Being Mortal author and also surgeon Atul Gawande tackles the hardest challenge of his profession: How medicine can not only improve life but also the process of its ending.

Another website worth looking at is www.mylongevity.com.au. This site takes into a range of factors about yourself and predicts your age at death, quite scary however very useful in terms of planning your life. I have included my results, click here to view. Looks like I’ll be around for a while.

Balancing act for funding your retirement is a tricky test

One of the most difficult – and important – calculations in finance is how much investment capital you will need for retirement.

To be able to calculate the savings needed, people need to make some assumptions about the amount of income they can safely draw from their retirement capital. This means finding the retirement income Goldilocks spot, drawing neither too much nor too little.

On the one hand, in retirement you want to have the best possible life, while on the other, you do not want the money to run out before you do.

Like Goldilocks’s porridge, chair and bed, the amount that you take and spend from your capital needs to be just right.

There is a rule of thumb in finance which says that in retirement, you can draw 4 per cent of your savings to live on each year. The 4 per cent rule tells you that for every $100,000 you have saved, you can take $4000 in income each year for 30 years.

Given its importance to retired people’s finances, this 4 per cent rule has been much studied. Although it has been criticised by some, it is largely still considered by most to be a fairly useful tool for modelling what a retired investor can expect to be able to live on.

It may be a bit rough and ready, but having a rule of thumb like that is very useful when planning your finances.

There are several things that could make the 4 per cent rule either too optimistic or too pessimistic.

Firstly, the 4 per cent drawdown rule is based on someone having a balanced portfolio (50 per cent of the portfolio in shares and property, with the other 50 per cent in bonds and cash). If you arrange the portfolio so that it is more conservative than this, your returns are likely to be lower, and so your drawings should be correspondingly lower. Such a conservative portfolio will have less volatility, but the money is more likely to run out before you do.

Conversely, if you invest more aggressively, your money might last longer but the volatility risk will be higher.

Secondly, the sequence of your returns may not be good. Returns from any portfolio will be volatile, but the timing of the volatility may be unfortunate. For example, if there is a major market fall shortly before or after retirement, it will be difficult to maintain the planned income drawdown.

It is close to retirement when the portfolio is at its highest value, so a major market fall then will see the greatest loss of money.

This is why it is often wise to start to lower your investment risk as you approach retirement.

Thirdly, some people are uncomfortable watching their capital decline.

Drawing 4 per cent will usually mean that not just investment returns are being spent, but the capital itself is being used to the extent that nothing is left after 30 years. If you want to maintain investment capital for inheritances, your drawdown rate will need to be less than 4 per cent.

Planning this decumulation phase is as tricky as it is important – and, unlike Goldilocks, there is not much room for experimentation.

 

Article from Sunday Star Times by Martin Hawes

Time to be selfish

I appreciate this is an American magazine; however I strongly suspect the trends spoken about are quite similar.

Baby boomers are putting their retirements at risk by spending too much on their adult children. With real wages stagnant and unemployment among those age 16 to 24 running above 12 percent, large numbers of households continue to dole out cash to children no longer in school, covering rent, cell phones, cars, and vacations.

A July 2014 survey by American Consumer Credit Counseling, a Boston nonprofit, found that a higher proportion of U.S. households (1 in 3) provide financial assistance to adult children than support for elderly parents (1 in 5). “This is putting a huge wrench into retirement savings,” says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis in Dallas. “The more boomers put out for adult kids, the less they can put aside for themselves, which is scary as they live longer and need savings to last them into their 80s and 90s.”

More than a third of adult millennials receive regular financial support from their parents, and 1 in 5 still live at home and don’t pay rent or expenses, according to a November 2014 survey by Bank of America. It isn’t just the unemployed or the low-paid who are needy. The poll, which had 1,000 respondents between the ages of 18 and 34, found that among those earning more than $75,000 a year, 25 percent had their parents pay for groceries at some point and 21 percent got money for clothing.

If parents have extra money left over each month, they should be maxing out their contributions to 401(k) plans or paying down mortgages or other debt, not subsidizing their kids, financial advisers say. “You can’t take out a loan for retirement,” says John Sweeney, executive vice president for retirement and investing strategies at Fidelity Investments. “So the less well-off you are, the more you have to say to grown children, ‘I don’t have it to give.’ ”

Gillian Anderson, head of Anderson Wealth Management in Westport, Conn., says so many of her clients are helping their 20- and 30-something kids financially that she advises other parents who consult her to budget for the possibility that they may have to do the same. “It runs the gamut from giving regular allowances because millennials often aren’t earning enough to cover rent and food, to help with legal bills if a child is going through a divorce, to occasional payments for a coat or plane ticket,” she says.

Whatever the reason, this prolonged support is squeezing even affluent boomers. The executive director of a nonprofit in Seattle gave her daughter and son-in-law a total of $12,000 in 2014 to pay for child care, home repairs, and other bills—and plans to give at least as much this year. The 66-year-old woman earns $230,000 a year, while the couple are working professionals in their 30s with a combined annual income of about $115,000. The mother, who asked not to be identified because she didn’t want friends and work colleagues to know about her situation, says she’d like to retire, but her financial planner has warned her that the $2.5 million she’s set aside will run out by her early 80’s at her current rate of spending.

Fidelity’s Sweeney says it’s a bad idea even for affluent parents, to fund their adult kids. “Giving them tens of thousands of dollars a year for apartments, cars, and restaurant meals sends the message that you’ll keep paying for a lifestyle they can’t afford on their own—and you probably can’t or don’t want to fund forever,” he says. “Better to teach them to burn less than they earn, and save all you need for a long old age.”

 

Article from Business Week Magazine 9 – 15 March 2015 by Carol Hymowitz

Planning your Superannuation

The logical way to plan your super is in two steps:

  1. Work out how much you will need in retirement.
  2. Work out how much you need to save to get that amount.

As with any long-term plans, there are many variables and plenty of scope for things not to work out as planned. The Office of the Retirement  Commissioner has produced material to help with these calculations. This information is free, so why not use it?

How much will you need in retirement?

There’s not always an easy answer to this one. There are many unknowns, about which you need to make educated guesses, such as:

  • The age at which you will stop working (many people can and wish to continue working beyond age 65).
  • The age you will live to.
  • The lifestyle you will want. It may be cheaper to live in retirement but you may want to continue some expensive habits.
  • Your health-care needs.
  • The amount of government assistance.
  • Investment rates of return while you are in retirement.
  • The rate of inflation between now and retirement.
  • The degree to which you will be comfortable spending your capital – if you spend everything there will be no inheritance for your children.
  • Whether you will use the equity in your house to live on.

If you can calculate how much you will want each month to live, there are financial tables to work out the amount of capital required to give that amount. There is plenty of scope for those calculations to be inaccurate, but it is still an exercise worth doing. As a benchmark, it is generally thought that most people need about 70 per cent of the income they require before retirement.

How much should you save?

Once you have calculated the capital sum you need to produce a reasonable income, it is relatively easy to work out how much you must save. There are two main variables:

1. The time you have before you are likely to retire

Remember this plan may change: some people decide to retire sooner; some have retirement forced on them by ill-health or redundancy; others decide to work longer.

2. The returns you have before you are likely to retire

This is harder to predict, but over time a good diversified portfolio should earn 5 per cent after tax and fees.

If you know these two things, and the capital sum you require, it’s relatively easy to calculate the amount you must save weekly. A financial planner can make this calculation or you can use the Retirement Commissioner’s website www.sorted.org.nz. If you can’t afford to save the amount you have calculated, don’t despair. Save what you can within your budget and lifestyle. As time goes by you will probably be able to save more: your salary may rise, you may pay off the mortgage your partner/spouse may go back to work etc. Even a little saved now helps – it provides a base and will grow as the returns compound over the years.

Start early

Most people should pay off their mortgage before they start to save. However, as soon as you can, start saving and investing. Time makes all the difference:

The more time you have, the more you can tuck away. If you start at age 45, you have 240 months to make regular payments into a fund before reaching 65; if you start at age 35, you have 360 months.

The more you have, the better compound interest will work for you.

  • Age 45 years, saving $200 per month (6 per cent) at 65 years: $92,800
  • Age 35 years saving $200 per month (6 per cent) at 65 years: $201,900

The difference is obvious. Start saving as soon as you can!

 

Taken from: Financial Secrets, Martin Hawes, April 2002

KiwiSaver as a DHB employee

As you are aware Kiwisaver can be part or all of your DHB subsidy. The absolute majority of doctors who I deal with in Kiwisaver are in it on a splitting basis with superannuation.

Contribution levels

These are fixed at either 3%, 4% or 8% of your gross income. No other figure is possible. If you wish to save additional monies super offers flexibility here in that you can save any amount. Note that if you are only in Kiwisaver and wish to pick up the 6% gross DHB subsidy you need to save 8% as 6% is not an option.

Access

Standard features for access for both super and Kiwisaver include death, permanent disablement and financial hardship.

Funds can be accessed from Kiwisaver other than these in two circumstances:

  • If you haven’t purchased your first home once you have been a member for 3 years and made 3 years contributions you can withdraw both your and the employer contributions towards your deposit.
  • Once you reach the age of eligibility for NZ Super (currently 65) your funds are available. Of course the government decides on this age which needs to increase over time due to the demographics.

Government benefits

Currently when you enrol in Kiwisaver the government deposits a one off lump sum of $1,000. In addition if you contribute at least $1,042/yr the government will add a tax credit annually of $521. This means at a 3% contribution rate you need to be earning a minimum of $34,733 gross per year. If you have additional self employment income and are not set up for PAYE, you can invest the $1,042 annually and pick up the tax credit. Note The Kiwisaver tax credit year runs from 1 July to 30 June each year. In the first year of membership you will only receive a proportionate amount of tax credit based on what time of the year your $1,042 investment was made. This is not an issue in subsequent years.

Changing providers

It is easy to change providers. All you need to do is complete an application for the new scheme and the rest is taken care of.

Opt out process

Should you not wish to join Kiwisaver you need to opt out within the first 8 weeks of joining a new employer (note you cannot opt out in the first two weeks, however deductions over this time will be refunded).  Opting out needs to be exercised each time you start with a new employer. Of course if you join Kiwisaver it will follow you around (like a loyal dog) employers without the need to re join.

Contribution holiday

If you wish to stop contributing to Kiwisaver for a period of time (up to five years at a time) you can, once you have contributed for a year.  Should you wish or need to, contribution holidays can be rolled over every 5 years. The process for a contribution holiday is to complete a contribution holiday form (KS6 obtained from www.kiwisaver.govt.nz ) and send it to the IRD. Once they have replied and confirmed this, forward their confirmation to your payroll.

The future

One thing (and this would be my biggest criticism of Kiwisaver) you can be guaranteed about Kiwisaver is that it will be constantly changing. The reason for this is that the government make the rules. Since it was created in 2007 there have been numerous changes (without going into the details).  You will no doubt be aware that if Labour is the government after the September election there will be further changes (compulsion, increase in contribution rates, ability for the Reserve Bank to increase contribution rates as a monetary policy tool and finally a likely increase in the retirement age (which I agree with).

Conclusion

Kiwisaver is here for good. It can be a useful part of your retirement savings mix. The key is to understand its nuiances so it can work to your best advantage.

How do I determine my risk profile?

Lots of doctors I meet have no or little understanding of investment which is not surprising given your focus and time is spent in obtaining your qualifications, treating patients and keeping up with your education.  I would encourage you to make it your business to learn about investments. The main aspects of determining your risk profile centre around the following:

  1. Your time horizon
  2. Your investment experience/knowledge
  3. Your job security
  4. Your comfort level with market volatility

1. Time Horizon

If you have a long time horizon which typically you do for retirement savings (assuming you start in either your 20’s 30’s or 40’s) you can choose riskier (and also higher returning) investments such as shares and property. The reason for this is that even though share and property markets experience losses from time to time they always recover and move higher over time. If you have shorter time horizons such as 1-3 years you need to opt for safer investments such as cash and bonds. These investments experience low volatility however also no (cash) and low growth (bonds).

2. Your investment experience/knowledge

It would be fair to say that if you have had experience in owning shares or managed funds for example that have suffered historical losses you are more likely to be comfortable owning these in the future. Also knowledge of investment markets can prepare you for losses or give you insight as to when you may sell or switch to cash.

3. Job security

You are pretty fortunate that you have excellent job security. This means that you can take more risk with your investments than people whose job security is not that great such as some senior management roles in listed companies.

4. Your comfort level with market volatility

Some people are naturally conservative and are risk adverse which means they should only be opting for low risk investments such as conservative, cash or bond funds. If you are more of a risk taker and prepared to accept volatility, on the premise that your longer term gains will be greater you need to be including a reasonable percentage of shares and property in your portfolios. As long as you stay invested when markets lose ground you will be rewarded as they always recover (even though it can be a fairly long wait at times).