NZ Herald 13 July 2019

APersonal finance writers tend to err on the careful side. We don’t want someone to come back later and say, “I did what you suggested, and now I’m in big trouble”.

With that in mind, I normally say it’s better to get rid of debt, unless you are borrowing to buy something — such as rental property — that’s likely to boost your wealth in the long run.

Wisely, you’re not planning on that for the Italian property. It’s hard enough trying to predict the New Zealand property market, let alone a foreign one. Anything could happen over there in future — including foreign property investors being kicked out with no compensation.

So that means you should pay down your debt first, right? Well perhaps not. There’s another side to this. If you wait until you have all your ducks in a row — or should that be Trevi Fountain pigeons? — several years will have gone by. That’s several fewer years to enjoy Italy.

It’s always good in these situations to work through a worst case scenario. What if:

• There are unforeseen expenses on the Italian property — or in New Zealand for that matter? Owning four properties increases your chances that one will have big maintenance problems.
• Mortgage rates rise to the point that you are struggling? This is something every property investor should allow for. Rates are extraordinarily low now, and can’t stay that way forever.
• One of you loses your job and the new job is on lower pay? That could even happen to both of you.

Could you cope? While your mortgages total $740,000, your assets total more than $2 million. If you find yourselves in a tight spot, you could sell one of the rental properties, or even both of them. You’re covered.

What’s more, you’re relatively young, which makes it safer to take financial risks. There’s time to recover.

Say “Phooey” to your friends, who just might be a wee bit jealous. If you had spent that money on a car, perhaps they would be less critical — although not necessarily, I suppose. Anyway, once they start receiving invitations to stay in your “casa vacanze” they might change their tune.

AThat’s tough having to retire early because of health issues. But at least you’ve got lots more savings than most people.

You may have seen last week’s second Q&A, on what a couple should do with their savings at around retirement time. The same basic idea actually applies to anyone at any age, as follows:

• Put the money you expect to spend within three years in “cash” — bank term deposits or a cash fund.
• Put the three- to ten-year money in a fund that holds largely bonds.
• Put the ten-year-plus money in a share fund. It will be more volatile, but it will grow more over the long term.

As explained last week, you can use the online Smart Investor tool to select funds.

Every now and then — preferably not right after a market downturn — move money from shares to bonds, and from bonds to cash, to maintain the three-year and ten-year horizons.

For a young person, this plan might mean putting all their retirement savings in a share fund, but with savings for a car or house in cash or bonds.

For you, it means putting most in a share fund, except the money you plan to spend within ten years — from age 60 to 65 — which should go into a bond fund.

Each year or so, transfer some from shares to bonds. And from 57 onwards transfer some from bonds to cash. The aim is to reach 60 with your spending until 63 in cash, your spending from 63 to 70 in bonds, and the rest in shares.

Note that all of this, for everyone at any age, assumes you can cope with seeing your share fund investment sometimes drop lots. It will almost certainly recover, and go on to grow well, within ten years — before you plan to spend it. But you must promise yourself not to panic and move the money when it has fallen.

If you can’t cope with a big plunge, skip the share fund and keep all your longer-term money in a bond fund. It’s a pity though. You won’t have as much to spend over the years.

AThere are several rules of thumb on how much to spend in retirement.

With all of them, you spend not just the returns — interest, dividends and so on — but also the savings themselves. But in the meantime, your savings keep earning returns.

Before you do any calculations, set some money aside for big expenses, such as a new roof or car, medical bills, or travel. That should be included in your cash fund — see the above Q&A.

Here are three rules for how to spend the rest of your savings, summarized from my book Rich Enough? A Laid-back Guide for Every Kiwi :

1. If you retire at 65 with X hundred thousand dollars, you can spend $X a week.

• For example, if your savings total $100,000, you can spend $100 a week above NZ Super. With $500,000 you can spend $500 a week.

  You probably won’t run out of money, although you may if you live into your nineties. By then, though, most people say NZ Super is enough.

  How long your savings last depends what happens to returns over time, and what you invest in. If you use the three funds as outlined above, your money should last longer than in more conservative investments.

2. If you retire at 65, each year you can spend 6 per cent of your savings at the start of retirement.

• With $100,000 you could spend $6000 a year — or $115 a week. With $500,000 it would be $30,000 a year or $577 a week.

  This gives you slightly more to spend than the first rule, and therefore a slightly higher chance of running out in, say, your late eighties.

With both of these rules, if you retire before 65 you should spend a bit less, and if it’s after 65 you can spend a bit more. The next rule is more flexible about your retirement age.

3. Divide your money by the years you want it to last.

• Let’s say you retire at 70 and want your money to last until you’re 90 — after which you’ll live on NZ Super.

  In the first year spend 1/20 of your savings, in the second year 1/19, and so on. In the second to last year you’ll spend half your savings and in the final year you’ll blow the lot and switch to Super only — although of course you could choose instead to eke out the money in the last few years.

  You won’t know in advance exactly how much you can spend the following year. It will depend on your returns. But unlike the other two rules, you know how long your savings will last.

What about inflation? Under the first two rules, your income won’t grow with inflation. But NZ Super rises by more than inflation, and in any case most people spend less as they progress through retirement. Under the third rule your spending is likely to increase each year because your savings are earning returns.

There’s more on all this in my book. The second and third rules come from the Society of Actuaries — who are experts on money and statistics. For info about the assumptions they used, see here.

ASee the above two Q&As. Let’s use your $340,000 as an example. We’ll set aside $40,000 for big expenses, and allocate the $300,000:

• Under the first rule, you can spend $300 a week, or $15,600 a year.
• Under the second rule, you can spend $18,000 a year.
• Under the third rule, if you want the money to last 20 years, you can spend $15,000 in the first year. The amount will rise a little each year.