NZ Herald - Plus Feature August 2023

A New Zealand Herald Comme ercial Publication | Thursday 31 August, 2023

THE FINANCE ISSUE

Budgeting in retirement | Investing in quality Kiwisaver | Helping your children financially

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inside

Smart budgeting strategies for retirement

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Choosing quality over quantity

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Legacy gifting

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Smart spending for seniors

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Helping your children financially

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Money matters and comfort counts

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Review your KiwiSaver

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Inflation vs term deposits

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Smart budgeting strategies for retirement

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udgeting for a blissful retirement takes work. In 2022, Te Ara Ahunga Ora, the Retirement Commission found 65% of people aged over 55 have no plan or only a vague plan of how they will fund their retirement.

It’s difficult to live on NZ Superannuation alone. Any retiree can tell you that. And most New Zealanders don’t have the magical figure of $1m in savings, which many experts say is necessary to live in comfort.

Time invested now in planning and budgeting for retirement, can make for a better life post 65.

How to set up a retirement budget The first step to creating a budget for retirement is to work out how much money you need to live. Take your current monthly or annual spending as a starting point.

Remove any costs that are specifically related to work, such as petrol, lunches out, and a corporate wardrobe. Then add in extra money for activities such as entertainment and travel. More time not working often means more spending. Remember that health costs and/or insurance premiums tend to rise in retirement.

Confronting realities The reality of a retirement budget can be confronting. Many people find they spend very little less than when they were working, and NZ Super payments just don’t cut it. The question then turns to how to make ends meet.

That budget shortfall is one of the reasons that more and more people are working beyond 65.

Brad Olsen, principal economist at

Infometrics says over the past 36 years participation in the workforce by the 65-69 age group has risen by nearly 34 percentage points from only 14.5% of that age group active in the labour market in 1987 to 48.4% in 2023. More people aged over 70 are working than used to as well, says Olsen.

Retirees who own investment properties, can earn income from them, and when the homes are sold eventually, extra capital.

However tenants don’t always provide for a quiet trouble free retirement. Nor, as they age, can some landlords keep up the work involved in managing investment properties.

savings.

Or retirees can ‘eat the house’ by getting a reverse mortgage from providers such as Heartland Bank. These are lump sum loans against capital in the home, with no monthly repayments. Instead, the interest that would have been paid builds up on top of the loan.

Reverse mortgages don’t need to be repaid until the homeowners die, or the home is sold to move into a retirement village, rest home or other accommodation. It’s at that point that the capital is repaid to the bank along with all the interest that has been building up steadily over time.

Eat the house One common way to supplement NZ Super is to ‘eat the house’. That usually means downsizing to a cheaper home, to release capital, which then becomes retirement

What to do with the lump sum Those lucky enough to retire with a lump sum of KiwiSaver or other investments need to decide what to do with it. Many are tempted to withdraw their investments and put the

| 5 money in term deposits. However inflation eats away at the capital over time, and retirees can expect to live for 25 to 30 years.

A better approach, say experts, is to keep a portion of that retirement income in growth assets such as KiwiSaver.

The New Zealand Society of Actuaries offers several rules of thumb to make people’s nest eggs last as long as they do, providing an annual income to supplement NZ Super.

• 6% rule. This involves withdrawing 6% of the starting sum of your retirement savings each year. This gives a higher income at the start of retirement, but may not leave much for an inheritance.

• 4% rule. Reducing the annual withdrawal to 4%, but increasing that by inflation each year, makes the money last longer with leftovers for inheritances.

• Fixed date rule. Each year take out the current value of your savings divided by the number of years left to that fixed date.

• Life Expectancy Rule. Each year take out the current value of your retirement savings divided by the average remaining life expectancy at that time.

These rules typically rely on a proportion of the outstanding capital not needed immediately to be kept in growth assets such as KiwiSaver.

Budgeting in retirement

Budgeting works the same in retirement as it does at any life stage. Take your income, and divide it into categories such as housing, health, transport, entertainment, holidays, gifts, and donations. The more you can break this down into subcategories the better. Housing, for example, covers a multitude of expenses ranging from rent or mortgage payments, to insurance, rates, repairs, electricity, telephone, Internet and other costs. A good place to start, if in doubt, is by filling in the categories with existing spending.

When budgeting, don’t forget to include a monthly amount for annual costs such as house insurance, and memberships.

They’re easy to forget.

You also need to include savings for periodic expenses such as upgrading the car, replacing the roof on the house, or taking that trip of a lifetime.

Sorted.org.nz, the banks, and other organisations offer simple budget templates.

If the budget doesn’t balance then take a long hard look at each section and see

which can take a haircut. Otherwise it’s time to look for more ways to increase income.

When budgeting, consider how your spending will change over time. Kernel Wealth’s chief operating officer Stephen Upton has done the numbers for his own parents.

Upton divides retirement spending into three phases: the Go-Go Years (65is to 75ish), Slow-Go Years (75ish to 85ish), and the (No-Go Years).

In the Go-Go years it’s common to spend money on activities such as travelling and other bucket list activities.

During the Slow-Go middle retirement years people naturally start to spend less money. They travel less and might as Upton says swap tennis and dancing lessons for modest social activities, with the grandchildren taking centre stage.

In the No-Go years, people find themselves spending less and less, although healthcare can be the exception.

It’s not unusual at this stage to find yourself living on not much more than NZ Super alone.

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The case for choosing quality over quantity

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crimping on quality can be a mistake even on a limited income. Quality over quantity often pays for itself.

While buying quality may require an upfront investment, the reduced need for replacement ultimately saves money over time.

Cost Efficiency in the Long Run It might seem counterintuitive, but buying quality can actually be more cost-effective in the long run. While the initial price might be a bit galling, the extended lifespan means you save money in the long run. Cheaper items often wear out quickly, necessitating frequent replacements that cumulatively exceed the cost of investing in a single, high-quality alternative. If buying quality makes sense, and the upfront cost is too much, do what generations of New Zealanders have done before you: buy second hand.

Quality items last longer and are more durable. One of the most compelling reasons to opt for quality over quantity is the longevity and durability of well-made products. Some things just last for decades and stand the test of time.

It’s more sustainable. The climate emergency is real, and the consumer choices we make play a significant role in shaping the future of the planet. Buying quality often means buying sustainable, thus reducing waste. Sadly the likes of Kmart, the soon to arrive Ikea, and fast fashion labels encourage a throwaway culture that contributes to pollution and resource depletion. Whether it’s bicycle lights or dishwashers, buying quality should mean you buy fewer such items over the long term.

It’s more satisfying. Good quality products are designed to provide better performance and user experience. Whether it’s an espresso machine, or proper leather shoes, the

satisfaction of owning something quality can’t be underestimated. Buying quality feels really good.

It’s more mindful. Our society is focussed on consumption and there’s a certain allure to buying more and more stuff. However buying quality encourages us to step back and evaluate our needs. Buying fewer quality items helps us cultivate mindfulness in our consumption habits. This mindful approach to buying helps lead to a declutter life, which comes with reduced stress and a stronger connection to the things we own.

Quality is resilient. The gentle art of repairing stuff is making a comeback in New Zealand. Repair Cafés, bicycle hubs and other community organisations are reviving the repair culture. Whether it’s ornaments, clothing, small electrical items, or bicycles, there are volunteers around the country keen to teach people how to repair belongings.

Whether it’s a fast-fashion dress or a toaster that stops working, repairing belongings makes people more conscious of their value.

A note of warning. Expensive doesn’t always mean quality or something that will last. That can be the case with fashion. With electrical items expensive often means lots of extra features, rather than better quality. More features mean more things to break down.

And you may not need those features.

What’s more, certain brands such as Samsung, Dyson, Thermomix, and so on, charge a huge premium on their brand. Other brands might do the job just as well and last just as long, but cost less. With phones, for example, sometimes mid-range phones are still great quality, but at a fraction of the price.

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Legacy gifting - Murray and Lorna’s Story After he retired Murray spent many years as a volunteer driver and loved spending his time giving back, Murray is truly passionate about caring for others.

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is Cancer Society journey began in the late 90s when his first wife was diagnosed with cancer. Over the next five years, the Cancer Society was a key part of Lorna and Murray’s lives, providing support and care when they needed it most.

Devastatingly, Lorna passed away from cancer in 2005. Murray remembers: “When she passed away, she wanted to have a Will made up and she gave a generous donation to Cancer Society...going through cancer can be a very difficult time and it’s such a good service [Cancer Society] give, and so I said if it was good enough for her to do it, I’ll do it as well!

And my son, he’s also got Cancer Society in his Will.”

Lorna received a lot of support, especially during her last few months.

Murray still had to work and travel to support his family, keep his business running and pay the bills, Murray and

Lorna needed the extra help. “We couldn’t do without them – it’s just such an important organisation...nobody wants to see someone suffering through their cancer.”

Now living in the beautiful suburb of Karaka, 78-year-old Murray hasn’t lost his enthusiasm for helping other families facing cancer and wants to give back to everyone that supported them.

“I would say especially if you’ve been affected by cancer in your family, that you should seriously consider giving a donation in your Will...it goes to a very good cause, and they should be rewarded for the care and good work they do.”

Giving a gift in your will to the Cancer Society is one of the best ways you can continue to support New Zealanders facing cancer in the future. If you would like to know more about giving in this special way, please call Ashleigh on 09 930 7172 or email legacy@akcansoc.org.nz

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Smart spending for seniors Giving up work to retire can prove a financial stretch. The cost of living crisis isn’t making it any easier.

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any retirees become experts at making their money stretch further.

There are many tricks to trim spending without downgrading lifestyle.

Shop around for utilities and other essentials. Use switching sites such as Powerswitch to compare your energy plans, Internet and others such as mobile phone deals. But beware. Doing the maths is notoriously difficult. Retailers fudge their offers and hide the plan you’re on to make a true comparison difficult. “If your retailer does not appear in the top four results that’s a really good indicator that you’re paying too much,” says Powerswitch manager Paul Fuge. Beware as well of freebies and sign-up bonuses. Often you’re paying for that “free” vacuum cleaner or TV on offer. It’s much the same with “free” or discounted mobile phones. Make sure you diary the date when your power, Internet, or other deal finishes to

shop around again.

Waste less food. New Zealanders waste as much as 1/3rd of the food they buy. With more time in retirement there is no excuse not to meal plan. It can save a huge amount of money. Plan your meals around leftovers and ingredients that need eating up.

Buy less. Most “essentials’ ‘ people buy are wants not needs. Try having a month with no spending and analyse the savings. Even consider challenging yourself to eat only what’s in your fridge, freezer, and pantry for a week or two. There is a lot of learning to be had from this. Try PAK’n’SAVE’s Savey Meal-Bot for some meal ideas based on the ingredients you have already. Don’t just do this for food. Extend the buy less mentality to everything on your wants list. Focus on experiences, not things.

Save at the fuel pump. Petrol costs more per litre than full cream milk. With inflation

biting, saving fuel is becoming imperative.

A very good way to save money on petrol is to leave the car in the garage. The Gold Card and its free public transport is a godsend, and electric bicycles are increasingly popular with retirees. When you have to take the car out, consider doing multiple errands at once.

Other ways to save money on fuel include, buying hybrid or electric next time you upgrade the car, keeping it maintained, only using the air conditioning when necessary, and shopping around for cheaper fuel.

Consider signing up for Gaspy, or Z Energy’s Sharetank app.

Grow your own. Growing fruit, vegetables, herbs and other edibles can save a lot of money. If the main aim is to save money, then concentrate on growing fruit and vegetables that are prolific producers. Eating better for less folk save money by growing more obscure crops that cost a small fortune in the supermarket. Things like basil, berries, asparagus, chillies, fancy lettuces and so on.

Tracey Maddox, plant doctor at Kings Plant Barn, Stonefields, has a small garden so concentrates on growing dwarf fruit trees and high-producing plants such as tomatoes. Her two-year-old dwarf mandarin tree produced 23kg of fruit in one season. Maddox’s top three money savers for the garden are 1:

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citrus (including lemon, lime, orange and grapefruit); 2. brassicas (that’s cauliflower, broccoli, kale, and cabbage); and 3: leafy greens (lettuce, spinach and silverbeet).

Use your freezer: You don’t need a large freezer to save money. Freeze leftovers so they don’t go to waste. As the Love Food Hate Waste campaign points out that “sellby dates” should be viewed as “freeze-by dates”. You can also freeze part packets of all sorts of things from tortillas to pesto.

Ice cube containers are great for freezing anything that comes out of jars and cans and would otherwise go off. Tomato paste and coconut cream are great examples. You can even freeze entire lemons in season, and microwave when you’re ready to use.

Cut out unnecessary subscriptions. Check your bank and credit card statements for recurring subscriptions. It’s easy to forget about them, and those small payments add up to big money quickly. Do you actually use your Netflix, Neon or AppleTV subscriptions, or that software that once seemed a good idea?

Finally, this is about removing unnecessary spending, not feeling like you’re living in a monastery. Enjoy what you’ve worked for.

Just don’t waste it.

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The ins and outs of helping your children financially It’s human nature for parents to help their adult children financially. But that help comes in many different forms.

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ne of the best things a parent can do to help their child financially is to teach them young about financial adulting.

Cutting the financial umbilical cord There is even a school of thought that the financial umbilical cord needs to be cut once children turn 18 or 21. This argument goes that unless young adults learn early to stand on their own two feet, they may spend their lives asking for a hand out.

Boomerang kids, who keep coming home, can be a real problem. Many a family has a tale of adult children taking financial advantage of parents as they age.

The argument is, if they work part time, pay for their own uni and manage student loan repayments, young adults will be well on their way to financial independence.

Paying for uni, buying them a car and saving them from everyday expenses may be

hindering their future rather than helping it.

A surprising number of under 30s do manage to buy their first homes every year without parents stumping up deposits.

The bank of mum and dad None-the-less, the bank of mum and dad is alive and well in New Zealand. For parents who want to help financially to get their children into their first home, there are ways to do this.

Parents who can afford it often help their children with a first home deposit. They may gift or loan a deposit to their adult children.

Beware that banks need to see at least 5% genuine savings by the person/couple actually buying the home. Other ways to help include: • Going guarantor. No money changes hands if the parents guarantee the mortgage, although this comes with risk.

• Borrowing the deposit against your own home and lending or gifting it to the children

is another option. That way you’re not putting their own home on the line if the children fall into arrears. The downside, however, is that the children may not see repayments to mum and dad being as important as their other bills.

• Co-buy with the child. A parent buys a portion of the home and owns that until the child buys the older generation out. Beware that parents may be subject to the bright line tax if they do this.

The majority of parent-supported purchases go well. The parents’ assistance gives their adult children a leg up into home ownership, the younger generation becomes independent and gets on with paying down the mortgage.

But it can be a minefield.

Seek legal advice It’s essential for parents to take legal, financial, and tax advice before becoming the bank of mum and dad.

Families can fall out permanently as a result of these types of arrangements. Some children feel entitled to the money, and siblings can become jealous.

What’s more, some parents find themselves plunged into poverty in retirement thanks to guarantees and other arrangements if their

children are less than honourable.

The big “but” is if you’re lending money to a child who hasn’t learned to save, they’re probably not suitable to become homeowners anyway. Chances are, if they haven’t saved a bean, that they’ll make poor financial choices in the future. As tempting as it may be, it’s never a good idea to rescue adult children from themselves.

More than just money Some parents are not in a position to help their adult children financially. Living in intergenerational homes, can help, with grandparents able to babysit their grandchildren, and do before and after school care. That’s a huge financial benefit for the entire family.

Finally, one worry that most people don’t think about when parenting is the spectre of financial elder abuse later in life. Adult children who expect assistance can treat parents as an ATM, or even move in and take over their homes. Financial elder abuse is rife in New Zealand. Raising financially independent children can lessen the risk of falling victim to this behaviour when you become more vulnerable.

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Money matters and comfort counts: the value of reusable underwear for leaks Investing in leakproof underwear can be a smart financial move.

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pending more upfront can sometimes save money in life. That can be the case with the niggly problem of light bladder leakage.

Modern leakproof underwear is a practical solution for this age-old problem, which affects one in three women in New Zealand and one in five men, including many managing the after-effects of prostate cancer treatment. Being reusable, it can save you money over time, compared to forever shelling out for single-use pads, liners, shields and guards.

When incontinence starts to become a problem, many Kiwi women (and even some men) turn to single-use period products because they’re usually cheaper than specialist incontinence products, and there’s less stigma associated with buying them. But what many people don’t realise is that pads and liners designed for blood

are not likely to provide reliable protection for urine, which is less viscous and tends to be released in larger spurts.

Switching to modern reusable leakproof Just’nCase women’s briefs and Confitex for Men male trunks can be life changing.

These unique Kiwi-designed underwear look and feel just like ordinary fabric underwear, but have the added benefit of Confitex’s patented absorbent and leakproof textile right where it’s needed.

They’re discreet, comfortable, and far better for the planet than single-use absorbent hygiene products, which make up about 10 percent of the earth’s landfill.

The upfront cost of buying a few pairs of specialist absorbent underwear is higher than your weekly outlay on single-use liners, pads or shields, but because you can wash and wear them over and over again you’ll be saving money over time.

And you also need to factor in that you won’t have to buy ordinary underwear any more. Confitex underwear cost about the same as high-quality designer underwear, and last just as long. They have been independently lab tested and verified to withstand at least 52 wash and dry cycles without deterioration in performance.

And unlike many brands of washable absorbent underwear, Confitex products can be safely tumble-dried without affecting their leakproofing, which means you don’t need to buy as many pairs to always have a clean, dry pair in your drawer for tomorrow.

“Many of our long-term customers tell us that our underwear has been great value for money,” says Confitex founder and design director Frantisek Riha-Scott. “It’s ordinary underwear with extraordinary protection.”

The Confitex story is Kiwi ingenuity at its best. The company’s roots stretch back to 2013, when Frantisek and a friend came up with the ingenious idea of creating high-performance absorbent sports underwear to avoid toilet breaks during

endurance ski races. The pair quickly realised that absorbent underwear had a far wider application than downhill ski racing. It would be life-changing for women and men with light-to-medium urinary incontinence, offering them a comfortable and convenient way to reduce the number of single-use absorbent hygiene products they sent to landfill.

Drawing on his design training and extensive research into microscopic textile technology, Frantisek created a multilayered textile designed to quickly wick moisture away from the skin, absorbing liquid without leaking, even under bodyweight pressure. The rest is Confitex history.

Confitex for Men and Just’nCase by Confitex underwear comes in a variety of sizes, styles, absorbencies and colours. It is available only online from the official website confitex.co.nz, with discreet delivery to your door. Confitex recommends that new customers buy one pair first to trial in the comfort of home and check that the size and absorbency are right for you.

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Review your KiwiSaver and unlock its potential KiwiSaver grows best with regular savings and not too much tinkering. Even so, everybody should review their retirement savings every couple of years. Sleepwalking with investment is never a good idea.

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ife changes, the world changes, and everyone is slowly inching towards retirement.

Beware, however, of making rash decisions. Case in point was the short-lived Covid “crash” of 2020, when KiwiSaver balances plunged, people panicked, and many locked in those losses by switching to more conservative funds at the bottom of the market.

Just because your KiwiSaver balance is below what it might have been a few months earlier, doesn’t mean it’s a bad investment.

Most people who held their nerve in that crash have more in their funds now than those who panicked.

If, however, a fund is falling compared to equivalent funds, or your reaction to falling values is off the scale, then you might be in the wrong fund for you.

Here are five reasons to review your KiwiSaver: 1. The world changes. Few people predicted how KiwiSaver balances would soar after the initial Covid lockdown in 2020, or how they fell in 2022. Gyrations in prices can be a good wake-up call over how much risk an individual can tolerate. Anyone who freaked out in 2020 when KiwiSaver balances went into freefall, or in the slower steady decline in 2022, should seek advice.

2. Your personal circumstances change. Life changes. When you reach your 50s you may find your children flying the nest, divorce looming, or even unexpected redundancy.

It’s not always easy to find work in your 50s.

As we cycle through those different life transitions, our KiwiSaver needs may

change. Maybe your money has been in a growth fund ‘forever’. Most financial advisers recommend that money you may need to withdraw in the next five years (or even 10) should be in less volatile investments than a growth fund.

People who avoid making decisions should consider switching to a “life stages” KiwiSaver fund, which transitions the money from growth to balanced to conservative as the member ages. AMP, Generate, Lifestages, and other KiwiSaver providers offer this type of fund.

3. Rules change. The rules haven’t changed much for KiwiSaver, although the $1000 free kick start was removed in 2015, and there have been tax changes along the way.

Keep an eye out for changes that might affect you.

4. Funds and providers change. Every year new providers and funds enter the KiwiSaver arena. More and more investors are choosing sustainable options for KiwiSaver, which are becoming increasingly sophisticated. Another newish offering that is different from many is Kernel Wealth’s KiwiSaver plan, which launched in 2022. It allows members to build their own KiwiSaver mix of investments from a range of different funds. Craigs KiwiSaver offers a build-your-

own option as well. Other new KiwiSaver entrants include fund supermarket InvestNow, and ethical fund provider Pathfinder Asset Management. Always check out the lesser known providers that don’t spend a fortune on marketing.

The likes of MAS, Mercer, Koura Wealth, Fisher Funds, Milford, Juno, Summer and SmartShares all provide KiwiSaver options that suit some people.

5. Your ability to contribute changes. Most people who join KiwiSaver make minimum contributions of 3 per cent, which if they’re employed is matched by the employer.

As time goes on there may be reasons to increase that contribution percentage.

With retirement looming, some people get a wake-up call. Taking a break from saving for retirement can be financially harmful.

In addition to choosing conservative, balanced, growth or other “asset allocation”, any review of KiwiSaver needs to consider your financial values, risk tolerance, medium and long-term goals for the investment, and other investments owned.

Some KiwiSaver providers offer financial advice, or independent financial advisers can also help individuals make the right choice for them.

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Inflation versus term deposits: the risks of fixed returns The cost of living crisis is getting plenty of airtime. It’s not just groceries and heating that are hitting home for savers.

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ersistent high inflation is also decimating retirement savings kept in term deposits and other fixed interest investments.

With inflation running at 6% over the past year and few signs that the cost of living crisis won’t be slain any time soon, inflation is eroding term deposits. Retirees with money in term deposits and other fixed interest investments earning less than the rate of inflation are falling behind financially.

It’s unlikely any time soon that inflation will return to the 1-3% band that the Reserve Bank of New Zealand works to keep it at.

Even if inflation drops to 3% by 2025, as some economists predict, the inflationary tide will steadily erode fixed retirement savings.

One of the big issues, says AMP NZ managing director Jeff Ruscoe, is people

who haven’t taken financial advice are withdrawing their KiwiSaver and investing it in term deposits. Should those people live 25 or 30 years, it’s unlikely those term deposits will last the distance.

On the surface, term deposits are “safe” and the interest rates they pay have risen considerably. But that is illusory.

Term deposits rarely keep pace with the rate of inflation. That means the purchasing power is diminishing. In high inflation times, that’s a big risk to retirees’ nest eggs.

When it comes to the effect of inflation on term deposits, it’s worth looking at history.

The world experienced a decade of high inflation from 1970 to 1980 and people who relied on term deposits and fixed rate bonds at that time saw their savings eroded.

Many were earning 2.5% to 4% interest on savings in the bank, while inflation averaged

11.5% for the decade. That meant a lot less in the retirement pot when they finally clocked out of work for the last time. Or if they’d already retired, a big chunk of their capital was eroded by inflation long before they died.

We aren’t likely to hit 11.5% inflation in the foreseeable future. But Ruscoe says after 15 years, at even 2.5% inflation, the spending power of money in term deposits will have fallen by 31%.

“So if you are 50 today, and you want to continue to live a lifestyle like you do now, you’re going to need 31% more money by the time you get to retirement to live that lifestyle,” he says.

Financial advisers point out that the trick is that most people aren’t going to spend their retirement savings in the first five years of their retirement, and don’t need to withdraw everything to put in term deposits as some do.

Instead they should keep a portion of their retirement savings in growth investments. That might mean keeping some of the money in KiwiSaver until it’s needed, or other growth investments such as funds.

“Trying to make sure that your returns are keeping up with inflation is super important,” says Ruscoe.

“By investing in term deposits [retirees] fix their income, and it doesn’t go up with inflation. So you’re always going backwards in that space.”

Share-based funds may appear risky, however over time they tend to outpace inflation.

Ruscoe says a diversified portfolio with a portion in growth funds allows the capital to keep growing, instead of being eaten up by inflation.

Leave the planning to the experts, says Ruscoe. “I believe people need to get away from the DIY approach and get some proper help to match their investment plan to their spending plan.”

He cites the example of a road trip. “If you were heading off on a road trip into a country, you didn’t know, you would sit down and map out a plan.

“That’s the same with retirement planning. You know, if you don’t make that plan, you will just arrive, and you might not arrive at the right time and place.”

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