Martin Hawes: Two-sided mix best for retiring

In finance, the question "do we have enough to retire?" is the most difficult to answer because there are many uncertain factors which may play out over the long period of retirement.

However, it is a question you do need to get right - almost everyone lives in fear the money will run out before they do. This is a quite reasonable fear as none of us wants to end up living off dry toast and second-hand tea bags.

In my experience, the importance and the difficulty of the question leads to a lack of confidence, meaning a number of people calculate a figure that is much too high.

Some people end up hanging on in work longer than they really have to - a great shame in terms of a diminished lifestyle.

I find the biggest difficulty which stops people from taking the plunge away from work and towards the lives they want is fear of investment.

Again, this is an intelligent fear: few of us have had any experience or practice of using the capital we have to generate income, and it's a scary world out there.

The key to investment - all investment, not just in retirement - is to identify your liabilities and to set your asset allocation to meet those liabilities. In essence, the liabilities you have (to provide income in the case of the retired person) must be matched with an asset: the right investment.

Trouble comes because people think their investment returns must be in cash; they think capital gain is no good to them. This leads to over-investment in the likes of finance companies and corporate bonds which give higher income yield but no growth in income or capital.

Over-investment is seldom a good idea - neither corporate bonds nor finance companies are risk-free investments.

Retired people have another liability - inflation. You could be retired for 20 to 30 years or more and inflation can quietly steal your capital over that time.

Therefore, retired people should not depend solely on bonds and deposits for their income but own a sensible amount of shares and units in property funds as well.

Over time these give income growth and some capital growth. However, they will be volatile, so an allocation to them should not be too great.

Units in property trusts (things like Kiwi Income Property, AMP Office) make excellent investments for retired people as they give good income and provide some growth as well.

Shares in good businesses also provide growth, although some do not give much income.

However, you can take your capital profits simply by selling a few units. Because of tax, a dollar of capital gain is worth more than a dollar of yield.

Those using their capital for income on which to live should not avoid growth investments completely.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com