How to avoid running out of money when you retire
Once the work stops, preserving your income becomes vital.
Today’s retirees are divided into two general camps: the ones with enough money they never have to worry about it, or those with very little who rely mainly on the age pension.
“What you will find in the next 20 years is instead of people with too little, more will move into the middle ground where they have enough but it’s not enough to be super-comfortable,” says Club Plus Super chief executive Paul Cahill.
The best way to avoid running out of money is to save more before you retire. But if you can’t do that, here are a number of tips on managing finite cash resources.
1. Budget, budget, budget
As boring as they may seem, budgets are an effective way to watch your spending during your retirement.
Wealth for Life Financial Planning principal Rex Whitford says people generally spend 20 per cent more than they believe they do.
“It’s never how much you have – it’s how much you spend,” he says.
“In retirement you income changes and you need to do a budget – it’s pretty basic stuff. You can’t be as flippant with your money.”
A quick search online for “budget tools” will help you find templates and tips on building one that suits you and your needs.
2. Plan ahead
Along with your budget should be an outline of your future expenses, not just the short-term ones. If you’re thinking of buying a new car, renovating your home, or downsizing, these should all be accounted for.
“Down the track there may be a need to fund aged care,” Whitford says.
3. Extra incentives
Even if you don’t qualify for an age pension, you can still take advantage of other government incentives including cheaper medications, travel concessions, reduced council rates and water bill reductions.
“If you get enough of these bundled up you can save quite a bit of money,” Cahill says.
4. Fight fees
Fees from your superannuation may account for about one per cent of your annual investment returns. Expensive funds or advices will charge two to three per cent. Make sure you aren’t being ripped off!
“Fees erode large balances quickly. It’s the reverse engineering of compound interest – high fees take a high balance down much quicker,” Cahill says.
5. Growth is good
Growth assets such as shares and property help many build a bigger nest egg, but once they retire, people feel they should only stick with conservative cash investments.
“If you invest in cash and term deposits only your money will run out pretty quickly,” Cahill says.
Whitford says that growth assets are needed as a shield against the effects of inflation – at least in the early years of retirement.
6. Back to work?
Some older Kiwis might enjoy part-time work as a solution to stimulate the mind and bring in extra cash. Cahill says work is good for the soul. “We find a lot of people retire and come back 12 months later and say ‘I’m bored as hell, I’ve got to do something,’” he says.
Related links:
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Planning ahead checklist: have you ticked all of the boxes?