Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 7 December 2013
Q&As: The problem with do-it-yourself annuities
- Employee super schemes still offer annuities
- How new tool helps you choose a KiwiSaver provider
- 3 Q&As give advice to bankrupt couple from those who have been there
Question: I read your Q&A last week about some people wanting annuities. Me too. I have almost $120,000 in KiwiSaver and I retire this month. I will get $275 NZ Super in the hand each week.
I intend asking my KiwiSaver provider if they will debit my KiwiSaver $500 a week, ie treat my KiwiSaver account as an annuity. I still have a small job that, together with NZ Super and KiwiSaver pay, will give me $1100 net a week.
My wife turns 65 in three years and we are putting her small income and the odd dividends all into her KiwiSaver balanced fund. I will still contribute to my KiwiSaver with any interest or small dividend receipts, as I calculate that KiwiSaver returns seem (at the moment) better than term deposit rates.
Is my thinking reasonable or off beam?
Answer: Your thinking's pretty good, but it's a pity you don't have the option of buying an annuity.
While "do it yourself" works pretty well for home repairs or baking a cake, it's not so good when it comes to annuities.
The main problem is that you don't know when you'll die. An annuity pays you a regular amount until your death, whether it's right after you buy the annuity or 50 years later. On the other hand, if you set up a regular withdrawal from your KiwiSaver or other savings, the money might run out before you do.
And in your case, that looks likely, unless you're in poor health. If you simply divide $500 a week - or $26,000 a year - into $120,000, that suggests your money will last just 4.6 years.
That's not quite accurate of course, because your savings will probably be growing in the meantime. But that makes surprisingly little difference, as you can see on an online tool I like, at www.tinyurl.com/howlongwillmoneylast.
Put in your savings balance of $120,000, and a monthly withdrawal of $2167 - the equivalent of $500 a week. Under "Annual withdrawal increases" I suggest you put 0 per cent. There'll be inflation, of course, but retired people report that they tend to spend less and less as they get older.
The calculator asks for a before-tax return and a tax bracket. I suggest you put 0 for the tax bracket, and insert an after-tax return instead. Use the recent after-tax, after-fee return in your KiwiSaver fund, as shown on the new KiwiSaver Fund Finder on www.sorted.org.nz. Let's say it's 5 per cent. Hit "Submit".
The tool tells us your savings will last 5.3 years. Scroll down for a table that shows how the savings will decrease over that time.
What if you want the money to last 10 years? If you try different withdrawal amounts you'll find that you could make monthly withdrawals of $1280 over 10 years. Or $950 a month over 15 years.
Longer than that, the amounts are getting rather small. Anyway, some people say it's not hard to live on just NZ Super after 80 or 85, as long as you have a mortgage-free home.
Will your provider let you make regular withdrawals in retirement? Many providers do. If yours won't, move to one that does. Just ask your chosen new provider to arrange the move for you.
On putting your savings into KiwiSaver, if you're in a conservative fund that's probably fine. But if you're in a riskier fund, you - and your wife - might want to switch to lower risk funds. It's not a good idea to be in a volatile investment if you're withdrawing money from it. There'll be times when you're taking out money when markets are down.
You could ask your provider for some advice on this. If it's not forthcoming or not useful, try a new provider whose website suggests it will be more helpful.
Question: There are annuities, and the government has experience in them.
The Government Superannuation Scheme, closed to new members since the early 1990s, is one such scheme. The judges, politicians etc probably have other examples.
My Dad (91 next month and retired for 30 years) took half his money out and lives on his inflation-adjusted annuity ever since. I was made redundant 6.5 years ago and opted to take mine entirely as an annuity. As I effectively retired about 10 years earlier than he did and had contributed for a shorter period, my rate is less than half his.
As we both expect to live a long time, the annuity is a good investment for us.
Answer: I stand corrected. When I said last week that no company offers annuities in New Zealand any more, I was referring to individuals buying annuities from companies. But you're quite right that there are still employee super schemes that make annuity payments to members. And, as your father's example shows, they can be a good deal for those who live a long time.
Question: I wish to join KiwiSaver, but which provider do you choose? I have checked many many websites for information and I am now overloaded and confused slightly. Do I pick a low-fee plan which seems obvious or a higher fee one which has in the past had better returns? I know the past is not a certain guide but it's the only guide there is.
It seems the higher-fee ones are averaging the best longer-term returns! I would expect the same companies have the best returns over the longer term. I'm 41 and it's for me. I hope to contribute 8 per cent while I'm earning well and drop it down when I have a drop in hours and therefore salary.
What about for my two children (4 and 6), do the same rules apply when picking theirs?
Any advice would be appreciated. It's delaying my entry which is also adding to the stress.
Answer: Delay no more. The KiwiSaver Fund Finder should answer your questions.
You're probably best to start at step one, "Find the right type of fund for you". Answer three questions, and the tool will suggest whether you should be in a defensive, conservative, balanced, growth or aggressive fund. Defensive is the least risky and aggressive the most risky.
Next, you can compare all the funds of that type. I suggest you choose a provider based firstly on fees and then services. Only after that look at returns - simply because the tool of course uses past returns, and they're not necessarily going to be repeated. Often they're not.
But hang on a minute. You reckon higher-fee funds tend to have higher long-term returns, so you would probably look at returns first. Now that the Fund Finder is there, you might want to check out your hunch. I would be surprised if high fees and high after-tax, after-fees returns do go hand in hand.
On the question about your children, basically the same advice applies. Note, though, that children don't get KiwiSaver tax credits until they're 18. So, while it's good to sign them up to get the $1000 kick-start, you might not want to contribute after that, given that the money will be tied up until they buy a first home or retire. Then again, that aspect might appeal to you.
Question: You asked for thoughts on the bankrupt couple who wrote to you recently.
They have my sympathy. I was in a similar situation at a similar age. One's world collapses, feelings of failure are overwhelming, friends disappear. It's difficult to start again at this stage of life, but here is my suggestion.
To recover it is essential to take full responsibility for what's happened, to clear the mind of self-pity - playing the victim and dwelling on the past. One must build self discipline, set goals and overcome low self esteem. Also you need a bit of luck along the way re health etc. The best guide book is Brian Tracy's Maximum Achievement.
In my case after years of getting nowhere I finally got a job, saved everything, spent nothing, lived in my car and eventually became financial, bought property and retired.
Good luck to your correspondents. I hope this is helpful. It's not easy but not impossible.
Answer: Living in their car might be a step too far for our couple. It would be hard enough for one person! But your basic message is a good one.
Two other readers have offered to help the couple through the process. Read on.
Question: I feel for your correspondents. It's tough when life kicks you down and then stamps on you.
I'm a 70-year-old self-employed (nearly retired) management consultant, who's mostly worked for large corporations or mid-sized companies. But I have done a bit of career planning with individual clients, and I have personally coped with "down" a bit - losing my wife to cancer and then redundancy six months later at age 53. Hence 17 years consulting.
My work has focussed a bit in decision support; helping people use a good process in making strategic decisions (and choosing a job is certainly strategic for an individual). Much of it is about understanding the limits and opportunities of the situation, and getting clear about your own values and priorities, so you can make clear-eyed choices between alternatives. I mainly just ask good questions, to guide the thinking process.
So if you don't get a better offer from someone who is very experienced at this, then feel free to pass on my email address to your correspondents. I would be happy to spend a few hours working with them, exploring their possibilities and limitations, helping them create a list of things they might investigate, getting them to enunciate what values matter to them in choosing between alternatives, and creating a plan about how they might go about it.
No rocket science, no magic cures, but some empathy, some experience, and no charge. And I'll buy the coffee.
Answer: Coffee as well! I've forwarded your email to the couple. I hope they take you up on it.
Question: I was made bankrupt through a business failure in 1998. I know exactly what they are going through, I was about the same age.
The wife's poor health is almost certainly at least in part due to the stress. The husband however is still relatively young. The key is for at least one of them to "re-invent" themselves, by acquiring a new (marketable) skill, e.g., a counselling diploma. Counselling of one kind or another is a growth industry. Also, older people are naturals at it from their life experience.
I would be happy to share my method of "self-reinvention" with them if they wished. Although I am a professional business mentor, I would do what I could for them at no cost. You are welcome to pass my email and phone number on to them.
Answer: Again, I hope the meeting happens.
Thanks to you and the correspondents above. The fact that you've all been through similar experiences to the couple is a big plus.
* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.