Is it OK for retirees to live it up?

An elderly couple are finding their hard-earned savings dwindling fast in rest home care. Photo / iStock

Q: Your advice to retirees to get out there and live it up — and not worry about investing money, or putting it into term investments — is probably a good idea. As you say, why not spend that money, on delicious restaurants, exotic trips abroad, flash cars, etc?

My husband and I were very careful and saved our hard-earned money, only to find that now it is dwindling fast in rest home care. We should not have bothered and blown the lot, because you can always call on the government for help.

Penalising those people who have saved by making them pay the full amount for rest home care, against those who have not and get assistance from the government, is so unfair.

A: Firstly, my "Spend more!" cry applies only to retirees in a strong financial position. Clearly it's not for those likely to run out of money in their old age.

On your point, I can understand why you feel that way. But let's consider the alternatives:

• The government doesn't subsidise anyone's rest home care, which means poorer old people who need that level of care wouldn't get it.

I think New Zealanders should be proud of the fact that — because of NZ Super and residential care subsidies — we have almost no serious poverty amongst the elderly. In a recent survey about "Retirement Reality and Expectations" by the Financial Markets Authority and the CFFC, just 4 per cent of retirees said they were "struggling to make ends meet".

• The government subsidises everyone's rest home care — including the very well-to-do.

We're already worried about affording NZ Super at current levels as the baby boomers grow old. Should younger people have to further support the wealthy old?

• The government thoroughly checks the background of everyone who applies for the residential care subsidy. The "worthy poor" get it, but those who squandered money when they were younger don't.

This would involve a huge invasion of privacy, with officials making subjective judgments. No thanks!

Surely the current system beats any of those. A bigger worry, perhaps, is that some wealthy people have squirrelled their money away in trusts so that they qualify for the subsidy. But Work and Income is clearly trying to stop that.

I notice on their website, at tinyurl.com/residentialcaresubsidy, three mentions of trusts. One says that when Work and Income is counting the assets of applicants for the subsidy, they include loans made to family trusts. Another says that income includes "income or payments from a trust or estate." And a third says: "We will need more information if you or your partner have ever: transferred assets to a trust, or been the settlor, trustee or beneficiary of a trust or estate."

Hopefully this means the greedy little trust trick is a thing of the past.

But where does this leave you? Could you perhaps take pride that you're able to pay your way — leaving more taxpayer money to help, say, children in poverty?

The next correspondent would probably say the government is already treating you well.

Benefit or entitlement?

Q: I enjoy reading your articles but was surprised by the unwitting hypocrisy of the pensioner's comments regarding credit card debt:

"It was with interest that I read your article on credit card charges. I can't believe that people think that it is okay to live on other people's money."

While I appreciate that many pensioners have worked very hard and experienced hardships such as war and economic depression, I do find it somewhat hypocritical for some not to acknowledge that they are now beneficiaries of the NZ social welfare system.

Although I hope to make it to the day where I can retire and receive a government benefit, I will try to bear in mind that I will be living — at least in part — on other people's money.

A: Oooh. I'm a bit scared to publish your letter for fear of being swamped with angry responses.

It's true, though, that NZ Super is paid from current taxes, not money that superannuitants contributed earlier in their lives.

However, many retirees would argue that their taxes over the years went towards superannuitants then, and now it's their turn. NZ Super, they would say, is not a benefit but an entitlement.

Let's just let people use whichever word they prefer. There now, has that calmed everyone down?

Preserve your capital

True comfort is knowing my wife will not have to continue in the workforce or subsist on a widow's benefit or be obliged to sell the house, writes this reader. Photo / iStock

Q: I read with interest your response two weeks ago to the retired couple, and wholeheartedly agree to keep away from tying up money in a relatively illiquid asset like rental property, with all the issues of tenants.

It interests me that you are suggesting flash cars, travel and concerts.

The couple's savings of $700,000 is not a lot of money, but even at call at 2.45 per cent, at a 17.5 per cent tax rate, it allows an income of $14,149 per annum. When added to their private pension and NZ Superannuation it gives a nett total per annum of nearly $53,000.

This is a reasonable amount to live on without squandering capital.

Do not spend capital. Accrue enough capital so the income from it is more than your living costs. The capital then can only appreciate, and with it also hopefully your income. I appreciate that few may be able to achieve this, but having accrued a capital amount, put it to use.

If you are going to your grave owning a home, what is the issue with also a capital sum which has given real financial comfort to you both, or the one left behind who will revert to the single living alone NZ Super?

I had a plan to become financially independent and have pursued this for my entire life. I have achieved that. I started investing in the capital markets at 17 years of age. I am now 63 and my wife is 59.

Eighteen months ago I was diagnosed with motor neuron disease. I now cannot speak or walk. The prognosis for this disease is poor.

I have not had a great deal of overseas travel or flash cars or boats, which I could have afforded. I stuck with new Japanese or Australian models, which I have kept for 10 years. I have indulged in a few excesses and have a lovely home. I will go to my grave before either of us is entitled to NZ Super.

Each to their own, but for me the true comfort is knowing my wife will not have to continue in the workforce or subsist on a widow's benefit or be obliged to sell the house.

The loss of a partner is traumatic enough without needing to sell the house and return to the workforce. Her having to continue in work to support us at this time would also be less than ideal.

The old curve ball may be just around the corner. This is of course only one man's view.

A: For the benefit of others, capital in this context means the money you start with in retirement. If, throughout your retirement, you spend only the interest, dividends or rental income earned on that money, you are preserving your capital.

In your case, clearly you're content with your level of spending without eating into your capital, and that's great.

But, as you acknowledge, not everyone has large enough retirement savings to generate as much income as they would like.

I see too many retired people getting by but lacking any luxuries, and then leaving not only a house but considerable savings. Their already well off children receive hundreds of thousands of dollars each, after their parents spent years pinching pennies.

That's why I encourage people to at least consider spending some of their capital.

In some circles it's become almost a cliché to talk about "SKIing" — spending the kids' inheritance. Blowing the lot is a bit extreme but, as I said the other day, if people leave their houses to their children, that's usually a pretty reasonable bequest.

In the Retirement Reality and Expectations survey mentioned above, it was interesting to see responses to a question about inheritance from people who had "a financial plan that will deliver the sort of lifestyle they want in retirement."

Of those yet to retire, 72 per cent said they had factored into their plan "the ability or wishes to leave an inheritance". But of those already retired, only 61 per cent said that. I suspect many of the remaining 39 per cent of retirees were expecting to leave their house, but apparently not much more than that.

In your case, of course, you're conscious of leaving your wife comfortably off for perhaps several decades of retirement. That's totally understandable. You two are going through tough times. I hope things go as well as possible.

Joint saving fund

If you're already in KiwiSaver, you could just put half your joint savings into each of your KiwiSaver accounts. Photo / iStock

Q: My partner and I are keen to start saving for a house. We have separate accounts and different saving habits (I have a small share portfolio while she uses an online saver account), but we would like to start a joint saving fund that can grow relatively quickly and that has limited access — as we won't be needing it for at least five years.

We would deposit a lump sum and then both make weekly contributions, like a personal KiwiSaver. So would something like a term deposit, bonus saver account or even some sort of PIE fund work?

Thankfully, living in the provinces means a deposit will be a realistic amount.

A: Great idea to make a plan. Firstly, if you're not both in KiwiSaver, you should join, as it's the best way to save for a first home. You get employer and government contributions as well as your own savings — and possibly also a HomeStart grant.

If you're already in KiwiSaver, you could just put half your joint savings into each of your KiwiSaver accounts. You can make extra contributions directly to your provider.

That could fill your two requirements — limited access and relatively fast growth. Note, though, that if you might buy the house within eight years or so, avoid a higher risk fund. It could plunge, and there would be too little time to recover. Go for a conservative fund, even though average returns probably won't be quite as high.

However, if you really want just one investment — for psychological reasons — you can't use KiwiSaver as all accounts are for individuals.

Still, you could use the KiwiSaver Fund Finder on Sorted.org.nz to find a suitable provider and fund, and then ask the provider if they have a similar non-KiwiSaver fund. Invest in that using a joint account.

By the way, all KiwiSaver funds and pretty much all other managed funds are PIEs, which pay lower tax.

Next week, from Monday through to Sunday, is Money Week, run by the Commission for Financial Capability (CFFC) — formerly the Retirement Commission.

All sorts of events — seminars, competitions, workshops, webinars — about money management, debt, investing, KiwiSaver and the like are being run all over the country by schools, churches, banks, government departments, stockbrokers, libraries, financial advisers and others. Most are free and open to all. To see what's happening in your area, visit their website.

Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.