Oliver McDougall and his wife, Lisa (names changed to protect identity) had planned well, or so they thought. “We thought we had everything under control, but we’re going to be about $1,500 short every month once we retire!”

At 65, they are both still working and currently earn about $230,000 a year before tax. Their major assets include their house, valued at about $1.1m, with a small mortgage of about $100,000 and they have about $200,000 in KiwiSaver and savings. Once they retired, they thought that cashing in on the house, down-sizing and tightening their belts would be enough of a lifestyle change to have the kind of retirement to which they were looking forward.

Assuming both Oliver and Lisa stopped working, their financial circumstances were laid out as follows:

  • House on Auckland’s North Shore - $1.1m
  • Savings - $200,000
  • New Zealand Superannuation - $32,892 for a married couple (after tax) or $2,741 a month.

But this is what their costs looked like:

  • Groceries
  • Rates and mortgage repayments
  • Cars, home, health and life insurance
  • Telephone bills
  • Sky Television costs
  • Water and electricity
  • Security costs
  • Once-a-week cleaner

Together, this list totalled an expense of $5,000 a month or $60,000 a year.

“We hadn’t done a budget for some time and what we found was pretty surprising,” Lisa said. “We were not only spending a lot more than we realised, but it became obvious we have quite a gap between what we thought we’d need and what we will actually need when we stop working. That gap was frightening, especially when we saw how little the pension will actually help to fill it – and I think we need some good financial advice now.”

This was what the maths revealed: If the McDougall’s sell their house for $1.1m.repay the $100,000 mortgage, and then buy somewhere for $750,000, they will have $450,000 in capital - $200,000 in savings and $250,000 from the sale of the house once the mortgage is cleared, less transaction costs. At current bank rates, they can expect to get around 2.65% interest on a fixed-term deposit over a five-year period. This would give them an income of $819.84 per month after tax at 17.5%, which equates to $9,838.08 per year.

Suddenly, a reasonably comfortable retirement had turned into a struggle to survive. They had a financial gap of approximately $17,000 a year.

“We still have options, though we clearly won’t have much of a discretionary income when we stop working,” said Oliver. “We can continue working, but we can’t count on that happening forever, and we can cut outgoings.”

By clearing their mortgage and cutting back on some of their bills, Oliver and Lisa felt they could reduce their expenditure from $5,000 a month to $3,500 a month. But they still have a gap: They will receive $2,741 a month from New Zealand Superannuation plus $820 from their term deposit giving them a total of $3,560 per month. This will leave them with only $60 extra per month with no money for discretionary spending. Certainly, no overseas trips, adventures or new hobbies. And they also hadn’t factored in rising medical costs many people encounter as they get older, nor inflation.

This is what is now known in the industry as the ‘gap years’. Unlike the ‘gap years’ of young people, these can be dark and frightening times for senior citizens.

There is another option. It’s a relatively new financial product in New Zealand – the Lifetime Income Fund - a step up from old style annuity investments. In older style annuities, the retiree would generally hand over a lump sum to an insurance company, or similar financial manager, and a fixed sum is paid out at regular intervals until they die. Any capital that remains becomes the property of the company. The sooner the retiree dies, the greater the profit for the company, and any benefit to their family is lost.

Our new Lifetime Income Fund ensures that the capital remains the property of the retiree. The money is invested into the Lifetime Income Fund, and a regular income is paid out to the retiree on a fortnightly or monthly basis. The regular income is insured which means that changes to interest rates or fluctuations in financial markets will not decrease the amount of income received, and income will continue to be paid for the rest of the retiree’s life. If there is capital left when the person dies, it's paid into the estate.

Using Britannia’s Lifetime Income Fund Calculator, the McDougall’s’ nest egg of $450,000 will, if invested in a Lifetime Income Fund, pay them $692.31 a fortnight, for the rest of their lives – or $18,000 a year, outperforming the five-year fixed-term deposit by about 55%. After they have stopped working, this will boost their income to almost $51,000 a year. They would still have to tighten their belts, as this only allows for their revised expenditure of $42,000 ($3,500 per month) as opposed to the $60,000 they currently spend.

“It’s still not much,” said Oliver, “But at least we’d be on the right side of the gap, with $9,000 for discretionary spending, and we could recoup that capital at any stage.”

Even if you are only just starting out, remember you can never start too early to save towards your retirement. If you are approaching retirement, it’s always a good idea to reassess your retirement funds on a regular basis. Don’t do it on your own, get expert advice and counsel from our financial advisers. For more information: britanniafinancial.co.nz/lifetime-income-fund or call us today and make an appointment.

Retirement comes quicker than you think. Plan correctly now. Talk to us today!


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Product Disclosure Statements for the Britannia Retirement Scheme and the Integral Master Trust are available from the schemes’ issuer, Britannia Financial Services Limited, phone 0800 500 811. Britannia Financial Services Limited is a Registered Financial Service Provider.

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