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Retirement marks the time when many people grasp the difference between saving and investing, according to financial commentator and adviser, Martin Hawes.
“People spend their working lives getting a cheque every fortnight, they’re encouraged to save, and they build up capital,” Hawes says. But converting that lump sum into regular retirement income can be the “hardest decision of all” for those used to the steady flow of money from employment or their business.
As a proudly DIY nation, some New Zealand retirees are happy enough to craft homespun investment strategies out of their lifetime savings. “It’s the classic farmer thing,” Hawes says. “They sell the family farm, buy a house to live in and a commercial property with a long-term tenant in the nearest town.”
But this traditional Kiwi retirement income plan is not as conservative as it appears. “They don’t realise that everything is hanging on that one asset,” he says.
While it may not be apparent over the short-term, Hawes says single-asset investment portfolios inevitably expose retirees to risks over longer periods. For example, in an economic slump that commercial property bankrolling your retirement may lose tenants and be difficult to sell.
“As boring as it may sound, you can’t beat a diversified portfolio,” he says. “Retirees need a bit of everything in the mix. They have to manage their capital with an eye on the next downturn… they need to have something in their portfolio that protects at least part of their capital and enables them to take advantage [of cheaper asset prices] if the market falls.”
The days of 8 per cent plus returns on bank deposits have long passed and are unlikely to return “any time soon”, he says.
“Some think they can still get an 8-10% return on their investments without taking on too much risk,” Hawes says. “When I tell them that a reasonable long-term return on a balanced portfolio is more like 5 per cent, they can be disappointed.”
He encourages retirees to consider laying-off at least part of their investment risk by using annuities. Hawes is also a director of New Zealand’s only annuity provider, Lifetime Retirement Income.
“I see annuities as really useful when retirees have definite ongoing costs that they have to cover,” he says. For example, say retirees own a mortgage-free house but have annual rates and maintenance expenses of about $5,000 – investing in an annuity that guarantees the required level of income can ensure they meet those lifestyle goals. Importantly, though, Hawes says retirees should view annuities in relation to their broader mix of assets.
“They are really part of your fixed income allocation,” he says.
Or, in investment terms just about every retiree intuitively understands, Hawes likens annuities to a kind of anti-mortgage.
“With a mortgage the bank gives you a lump sum that you drip-feed back to it over time,” he says. Whereas, in effect, annuities put retirees in the enviable position of banker by lending out their capital to be returned in regular payments: providing practical evidence, too, of the difference between saving and investing.
Martin Hawes is an authorized financial adviser and an independent director of Lifetime Retirement Income. Learn more about Lifetime and how you can get a guaranteed income in retirement.
Lifetime Asset Management Ltd is the issuer and manager of the Lifetime Income Fund. A Product Disclosure Statement is available online at lifetimeincome.co.nz