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Approaching retirement as a single person

Starting Out or Starting Over Front Cover HR

Starting outExtract from Starting Out or Starting Over: A Single Woman’s Guide to Money in NZ by Susan Edmunds 

Retirement is a different prospect for single people than those who are part of a couple. In terms of government support, what a single person gets in the pension is about 60 per cent of what a couple gets between them.

This means more pressure on the budget because many of your fixed costs – the house, the rates, lots of your power use – are the same whether it’s one person or two in a house.

What about if you’re relatively newly single?

A mid-life separation can be a killer financial blow.

If you and your partner split in your 50s or 60s, you can be left in a precarious position. If you’ve lived your life thus far on the assumption that there will be two of you to spread the cost of retirement, then find that it’s not the case, it can be a shock to your bank account as well as your emotions. Then, if you’re earning less than your ex and maybe still taking more responsibility for your kids and grandkids, you may find a much harder fight ahead of you to get back on track. This is a way that lots of women have their retirement plans derailed.

Women in this position should get some good independent financial advice and make paying off debt and getting on track a priority ahead of virtually anything else in their lives.

How much do you need?

You’ve probably seen lots of news stories about how you need at least $1 million or some other impossible number if you want to ever be able to stop work. This is not particularly helpful, especially if you’re struggling to get ahead week by week. In fact, it’s almost enough to make you give up.

How much you need will depend a lot on your own circumstances. What you need may be different to the needs of your friends and family.

You can assume that some of your outgoings will remain the same as when you were working, but others will change. You won’t have the travel costs of getting to work, the cost of your workday lunches or office wardrobe, or the contributions you’ve been making to your retirement account, for instance. But if you’re likely to want to take up a new hobby you may have costs associated with that. You might want to start going out to concerts more with your newfound free time – or visiting family around the world.

Massey University research shows a one-person household in the big New Zealand cities would need just under $600 a week to live a “no frills” lifestyle in retirement. In provincial centres, they’d need a bit less – about $560.  For a “choices” lifestyle, where they got to enjoy themselves a bit more, they would need $1175 a week in the main centres and $824 in the provincial towns.  That means, even in the leanest situations, you’d need some investments giving you at least an extra $170 to $200 a week on top of the pension, depending on where you are.

Most retirees start their retirement in good health and with lots of energy, so the first 10 or 15 years are the most expensive. Then lifestyle expenses may give way to a quieter life and then more medical expenses.

The New Zealand Society of Actuaries did some research on how people could make their money last in retirement and determined that there were four main “rules of thumb” that you can rely on.

  • Take out 6 per cent of the starting value of your savings each year.
  • Take out 4 per cent each year but increase the amount in line with inflation.
  • The fixed date rule: Work out how long you want your money to last and each year take out the current value of your savings divided by the number of years left.
  • The life expectancy rule: Each year, take out the current value of your retirement savings divided by however many years you expect to have left of life.

I think the first is the easiest to cope with and it’s a good guideline to indicate how much you need to have put aside. Say you wanted to be able to achieve that $600-a-week city lifestyle and wanted an extra $200 to add to your weekly pension income. You’d need about $175,000 saved to do that. That’s doable if you start early but if you’re 50 and looking at a sparse bank account, it could be tough going.

More products are becoming available to help people make their money last.

You might put some money into something like a variable annuity, such as the Lifetime option offered by Retirement Income Group. This offers a return of 5 per cent, guaranteed for life, on any money invested with it.  The return is guaranteed because, if the investments aren’t delivering, the annuity will use the money you initially put in to pay out your income each week.

If you had $100,000 to invest you could get $192.31 a fortnight for life from age 65 this way – and if you invested later, your return would increase. Any unused money is returned to your estate when you die, or if you want to withdraw it.

Or you could move your money into a managed fund that offers more of a focus on income – this sort of fund might invest in fixed-income products and equities that deliver high dividends.

Whatever you do, don’t plan to just stick it in the bank and expect it to be fine. Left there, it will be worth less with each year that goes by. It’s important to keep some money exposed to growth assets so that it at least keeps up with inflation – the last thing you want after all your hard work to amass a retirement savings pot is for it to be eroded by the spending power of each dollar falling away.

Working longer

There’s no law that requires you to quit your job at 65 and many people are choosing to continue to work, even when they are eligible for the pension. This has a double impact on your finances because you have the pension coming in, which you can put straight into savings or investment if you are still working, and it reduces the number of years for which you need to save income.

Starting Out or Starting Over Front Cover HRExtract from Starting Out or Starting Over: A Single Woman’s Guide to Money in NZ by Susan Edmunds 

Starting Out or Starting Over offers comprehensive practical advice on managing finances, investment savings, budgets and mortgages with case studies, exercises, worksheets and quizzes tailored specifically for women who are starting out on their careers or who are faced with managing their finances after a relationship break up.

Read more about the book here

Reprinted with permission. Published by New Holland Publishers (NZ). Newhollandpublishers.com. RRP$34.99