Preparing For Retirement Today:
Dealing With The Financial And Physical Issues
By Bruce H. Woodley
Published 21 Feb 2014
Pages: 91 approx.
Kindle ISBN: 9781927260197
ePub ISBN: 9781927260227
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Are you ready for retirement?
Bruce Woodley will get you started on planning for a financially secure, happy and healthy retirement. By exploring how to handle our savings and investments in a practical and common sense manner, both when we are working and in retirement, he shows that it is possible to reach our retirement goals and provide a future which is both fulfilling and enjoyable.
- The Philosophy of Retirement: Are You Ready?
- Preparing A Retirement Financial Plan
- Investments: Property, Fixed Interest, Bonds, Shares and IPO’s, Managed Funds and Finance Companies
- Direct Investing in: the Sharemarket, Unit Trusts, Superannuation Schemes, Annuities, Share Options and Option Trading
- Investing In Property and Home Equity Loans
- Family Trusts And Wills
- Planning a Lifestyle and Organisations For Retirement
- The Perils of Retirement Homes and Villages
- Where to Live: Apartments, Town Houses, Retirement Homes, Rest Homes, Hospitals
- Activities, Hobbies, Computers and Other Interests
- Medical Care and the Family
- Glossaries of Financial, Legal and Trust Terms
- Appendix – Retirement Plan Outline
The book also outlines how relationships can be improved, by helping men and women to understand that they often have different approaches to financial planning and managing money. It also identifies how to provide for family legal matters.
Woodley shows how the new 60 is the old 40 and that we can take charge of our own future, rather than retiring from life. With a positive approach to living life to the full, we can look forward to living our dreams in our older years, with more life ahead of us. We can stay young at heart.
3 — Investments: Property, Fixed Interest, Bonds, Shares and IPO’s
The first thing to recognise is that each category of investment has a different level of security and the rate of return should be compared to the risk of the investment. Beware also of the number of scam artists or unregistered financial advisors who operate in the finance industry and who may be acting as a commission agent for a finance or investment company carrying an unacceptable level of risk.
Remember the Bridgestone, Blue Chip and other finance company failures were promoted by so called financial advisors. Some major Banks have promoted investments which have either shown a recent loss or the investor has been unable to access their funds when they wanted them to pay for their retirement.
If you do not understand fully the risks and associated returns stay well clear of the investment and the advisor.
For example a bank deposit or government bond has a low level of risk, but has a relatively lower level of return on the investment than say, real estate or company shares, managed funds and bonds. To give a few practical examples we should consider the table below.
This illustrates that the higher the return the greater the risk and that the growth potential of the investment does not necessarily follow level of risk.
It is important to establish new investment goals at least every five years. A check list will help you assess the main purpose of the investment and your tolerance to risk. Consider these questions help to establish your goals:
- What are my objectives?
- Am I expecting to retire within the next five years?
- What are my income and capital expectations when I retire?
- What return do I expect to obtain from my investments?
- What sum am I prepared to save each year until I retire?
The Retirement Commissioner’s website www.sorted.org.nz has a formula which allows people to decide how long it would take to save a specific sum to set aside for their retirement.
As an example to generate $250,000 for the current retirement age of 65 and with a fixed interest rate of 5% per annum, it would require:
- $935 per month for 15 years
- $1610 per month for 10 years
- $3676 per month for 5 years.
It is not possible to get high returns with a low level of risk from investments such as bank deposits or government bonds. Most older people, or those thinking about retiring within say five years, will have a reasonably low level of tolerance to risk. Typically they will have 60% or more of their total investments in cash, fixed interest and local government or similar rated bonds.
Rental property has a low to moderate level of return. In many cases this is lower than the return from bank deposits or fixed interest investments. But this lower level of returns is offset by the possible growth potential when the property is sold. Capital gains tax will not apply on resale unless the vendor is classified by the Inland Revenue Department as either a speculator or a property developer by profession.
Shares can also be highly volatile when traded on the stock market depending upon the whims of investors, press releases, annual reports and earnings statements to the stock exchange.
Most financial advisors will advise their clients to invest some of their funds in most asset categories. However, if the investor has left their saving and investment strategy until late in life, advisors will recommend the safer classes of investments, e.g. bank deposits or high quality, fixed term company bonds.
Bear in mind that not all company bonds can be considered as safe investments. However, it is possible to secure bonds in large institutions such as power and gas utility companies, and national and government organisations, which have a high credit rating from key international credit rating agencies Moody’s and Standard and Poor’s.
Consider the tax implications of your investments. Some, such as annuities, are tax free and some shares and unit trusts come with tax imputation credits. If you are on a higher tax rate then say 30%, you should consider whether the investment return is tax free in your hands, as this could make it more desirable. Most rental properties do not attract much tax because of their allowable depreciation and deducted expenses, and the low level of return on the capital invested.
PIE’s – Portfolio Investment Entities (as at December 2013)
The highest tax rate for any investor in a PIE is 28% and the lowest is 10.5%. This is a tax break for people in the top two tax brackets — those earning more than $48,000 or $70,000 from 2010. This is particularly good for those in the top bracket, earning more than $70,000, as the top tax rate in other categories is 33%. Lower-income investors are in most cases taxed at 17.5% on their PIE income. However, people earning less than $14,000 — who pay 12.5% in tax — are worse off in a PIE investment.
A PIE that invests in New Zealand company shares, or in most large Australian listed company shares, won’t be taxed on capital gains on those shares, even if the shares are traded frequently. If you do not currently file a tax return, being in a PIE does not change that. More information on taxation is covered in Chapter 7 that covers family trusts.
Debt – Get rid of it promptly
The problem with credit cards and hire purchase or bank loans is that it is easy to get into debt and difficult to repay it when money gets tight. When we work it is customary to have a certain level of debt, e.g. car leases, home loans or the mortgages. When we have a reasonable level of income it is not difficult to service this debt.
When we are nearing retirement it is essential that this debt is reduced and cleared.
If we have a mortgage, pay it back as soon as possible. If we use credit cards, (e.g. to get rewards or air miles), they should be repaid each month so that their high penalty interest rates do not apply to the next month’s charges.
Regular payments such as rates, power, gas and credit card should be made by direct debit to a bank account so that interest/penalty fees do not apply.
Example: John and Joan had a standard 25 year mortgage for $100,000 at the then current interest rate of 7.5%. They discussed how to pay back the mortgage in 10 years instead of 25 years and found that with an additional $1,350 in mortgage payments per month, they could pay it back 15 years earlier and save about $230,000 in interest. This is a lot more than they would have got from most of their investments!
Rule of 72
This rule will allow you to calculate easily how to achieve your investment goals at a fixed rate and assist you when have set out your investment goals and the level of risk that you are prepared to accept.
The Rule of 72: This is an easy way to determine how long it will take a compounding investment to double if you know the annual return. If the return is 6% divide 72/ 6 = 12. But if you get a 12% return, your investment will double in six years: 72/12 = 6. This assumes that you do not spend the interest each year and allow it be added to the principle or compound. The opposite works for inflation. If inflation is 3% the money will halve in 72/3 = 24 years. When it rises to 4% the calculation is 72/4 = 18 years.
These include investments such as government stock, debentures, bank deposits (cash) and company bonds. Risk on fixed interest and other investments is rated by credit agencies such as Standard and Poor’s or Moody’s, and varies from AAA for a government agency downwards. Most large public companies and utilities would attract a rating from B+ to BBB. The lower the rating, the higher the risk and usually the lower rated companies pay a higher debenture interest rate.
Issuers of some fixed interest investments charge a penalty if you wish to redeem funds before maturity. Banks usually are prepared to settle by lowering the interest rate, (to a lower rate than originally payable), so that a smaller sum of interest is recovered. The lower rate is usually the current interest rate if it has fallen, or the call/ 30 day rate.
Bonds are different as they are sold on the stock exchange and depend upon other factors such as the credit rating of the issuing company, unexpired time until maturity, and whether other similar bonds have risen in return value, i.e. have similar bonds attracted a higher coupon (interest) rate than the bond which you were holding prior to sale? As they can be sold on the secondary stock market, bonds have the same advantages as shares, with the added advantages of being stable, less volatile, and producing a sound — sometimes high — interest income for the bond holder. They tend to produce a higher fixed interest rate — about 2% to 3% more — than bank deposits.
Commercial & Rental Property
A commercial property is rated on the capital value versus the return from tenants in the property. Most commercial properties would expect a return higher than 10%, e.g. a property valued at $1,000,000, with a yearly rental of $100,000, has a capital yield of 10%. However, other factors must be taken into account, such as:
- the term of the leases
- when the leases expire
- the ability of the tenants to pay a reasonable rental
- wear and tear on the building
- over renting where the rent has been set in the good times, but is unlikely to continue when the tenant leaves.
For these reasons residential and commercial property investments can and do have variables which fixed interest or term bank investments may not have.
Returns on shares vary much more than fixed interest and property. There is a higher risk, particularly over a short term — a 40% loss is not unusual. On the other hand you can also really well, as volatile returns over the long term may be higher.
Shares are a good investments if they are in high potential and secure companies, and can be held for five years or longer. Most investors approaching retirement would be unwise to invest in shares if they have limited funds available to invest. There is a risk that when cash funds are required, for say a new home or car, the value of the shares will be less than their original invested value.
In a typical example, over a period of 25 years, it has been shown that gains have only been made in 12 out of every 225 days, so if you are not selling your shares on one of these 12 days you are not likely to make as much profit as you could if you sold on the day when the share price was higher.
In other words the time when you decide to cash in your shares is more likely than not to be when the listed price is in decline.
Returns must be compared with the inflation rate. If the returns are too low then, they may be losing ground against the annual rate of inflation.
For this reason the funds may be better invested in a long term PIE investment where the investor, (if they have a company or family trust), can sometimes nominate the taxation payable. In many non-profit examples a nil tax may be payable thus, showing a reasonable return without taxation. The advantage with some government and blue chip corporate securities is that they can also be sold by a share broker if the need arises to liquidate the security.
Example: A company or family trust had bank deposits to the value of $50,000 which it invested at 6%. The interest of $2,100 net (after tax) is used to offset any operating losses. As a PIE investment, the company or trust has tax losses and is able to claim a nil tax rate and thus avoid the 30% tax take of $900 each year. If this tax saving of $900 each year is invested at 6% for five years, the company will make nearly a further $300 by compounding the interest on the principle.
If the company/trust claims back the withholding tax each year in its tax return it must wait for a refund before reinvesting the overpaid tax amount. The tax refund may also be frittered away if not reinvested.
Initial Public Offerings — IPOs
An IPO or share market launch is a type of public offering where shares in a company are sold to the general public, on a stock exchange, for the first time. Through this process, a private company becomes a public company. IPOs are used by companies to raise expansion capital, to possibly monetise the investments of early private investors, and to become publicly traded enterprises. Details of the proposed offering are disclosed to potential purchasers in a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting as an underwriter. Underwriters may assess the value of shares (share price), and establish a public market for the shares.
In theory the shareholders will get a company which, if restructured, is in better shape than it was before the IPO took place. Share prices in large companies issued by way of an IPO will often show an increase after a fairly short period, although this was not the case when the NZ Government issued an IPO on Mighty River Power Ltd — an energy company — in May 2013.
Be cautious when investing in an IPO where an associated equity company/bank does not retain some shareholding in the newly formed company. Also beware of dealing with share brokers who are acting as the prime seller of the share float, as they have an interest in selling as many shares as possible to get the company listed. The same rules apply to IPOs as to buying shares in already listed companies. Carefully check out the structure of the company, capital funding, its directors and plans for expansion etc.
- The fixed term investments carry lower returns but have less risk as well
- Shares should provide a higher return but only over the long term and carry more volatility and risk
- Diversity is the key to any value portfolio with less volatility
- Past performance is a poor guide to the future
- Understand the investment and the risk which comes with the possible return and be wary of financial advisors.
About The Author
Bruce Woodley was born in Whanganui where his parents had a small farm at Maxwell, north of Whanganui. He was employed as Deputy Manager at the Mobil Oil (NZ) Ltd terminal at Mt. Maunganui and in central Auckland. He graduated with a Business Management Diploma from the Auckland University of Technology. From 1975 to 2000 he owned and operated a management consultancy company which administered and assisted business and trade associations.
He also acted as mentor to companies on the North Shore for a number of years under the Business in the Community scheme sponsored by the City.
Bruce’s previous book, Profile of Associations: – How do they create wealth? published in 2008, was widely accepted by universities, libraries and learning institutions throughout the country.
retirement, retirement planning, retirement books, retirement living, financial investments, Aging well, Ageing well, New Zealand