Money Matters: Life really could be a beach

By MARY HOLM

Q: I may be made redundant, and jobs for which I am qualified are few and far between.

I am 40 and my wife, who is not working, is 50.

We are both keen on moving permanently to our freehold beach house to see in retirement.

With the redundancy money and the sale of our freehold Auckland property, after expenses we would have $400,000 cash.

If we were to invest this money into bank term deposits at 8.5 per cent we would earn approximately $34,000 a year. We have no children and could live within this budget, and I could look for part-time work to top up our income.

Is this as simple as it seems or are there hidden pitfalls both of us fail to see? Can our dream of becoming beach bums become a reality?

A: It's certainly possible. But you may find life a little tougher on the water's edge than you're picturing.

You two may live another 50 years yet. Huge changes will happen in that timespan. Think of what has changed since 1950.

While no one can forecast interest rates far ahead, the way things are looking now they are more likely to be lower, rather than higher, in the coming decades. That is largely because inflation is expected to stay relatively low.

Even if inflation does stay under control, any inflation rate above zero will badly erode the value of your nest egg -- and the buying power of the interest you earn on it -- over a long period.

With just 2 per cent inflation, the value of your money will halve in 35 years.

What's more, I think you're optimistic even hoping to start with an 8.5 per cent return. Long-term deposits are now paying more like 7.5 to 8 per cent. And don't forget you have to pay tax on that.

But enough gloom. Your beach house beckons, so let's see if we can make it your home.

I suggest you put your $400,000 into an annuity, sometimes called a pension. You give the money to an insurance company, and it gives you monthly payments until you die.

At your ages, that's probably a long way off. Because of that, you won't get such a good deal on an annuity. The older you are, the higher the monthly payments.

What you will get, though, is certainty of income. It won't drop if interest rates drop. And you're guaranteed not to run out of funds in your old age.

What's more -- and this is a real plus in your situation -- you can get an annuity that rises a set amount each year, which would help you to keep ahead of inflation.

AMP says that for $400,000 it would give you two an annuity that starts about $14,700 a year and rises by 2 per cent a year till you both die.

The annuity would come with guaranteed payments for 10 years, even if you had both died before then. Because the company has already paid tax on the money, you would pay no further tax -- another big plus.

Admittedly, $14,700 is hardly a grand income. But if you or your wife gets a part-time job you could make it work.

Once you're in the community, and find out what services the locals lack, the two of you could set up a small business that still allows plenty of time for beach walks. You might grow and sell vegetables, cook and deliver meals, mind people's baches when they're not there. Who knows?

You'll also have time to study. Is there something you've always wanted to learn to do that you could spin into an income generator? Being in a remote spot need not hold you back these days.

Once you get to retirement age, chances are you'll get at least some NZ Superannuation to help you out -- although no one can be sure about the qualifying age or amount.

How does all this sound? Good enough? Then go for it. The worst that can happen is that you decide in a couple of years to come back to the big smoke and work a while longer. You will still be young enough to do that.

But if it's all a bit worrying, you may need to work fulltime and save hard for a few more years. Not only would you then have more money for a bigger annuity, but you would be older, so the insurance company would pay you more.

I know you say it's hard to get a job in your field. But you're only 40. Find a new field

Q: All investment advisers say a portion of a portfolio should be in fixed interest-bearing assets, including bonds. But the return on these tends to be well below shares and managed funds.

How close to retirement should you start increasing this part of the portfolio for the sake of security? We will retire in eight years. It hurts me to look at the comparison of returns at this stage.

Our portfolio is well diversified otherwise, but is lacking in fixed-interest assets. What kind of bonds would you recommend to people in our age group?

Should we invest in Government stock or in the riskier higher-return corporate bonds? Should we juggle with short-term maturity or take a longer-term risk? In that case, is the risk really that much less than, for instance, with international managed funds, where the potential return is greater?


A: You may be investing in fixed interest already without realising it. You mention managed funds. A lot of them hold at least some fixed interest, although others invest purely in shares.

In any case -- and I'll probably get shot down in flames for saying this -- I don't think you must have fixed-interest investments in a long-term portfolio, even as you approach retirement.

For anyone of any age, if you need money within a few years it should probably be in a bank account, term deposit or similar. In other investments, there's too great a chance its value will fall.

But you don't need your retirement money for at least eight years. And even after you retire, you'll probably keep the bulk of your funds invested for a decade or two.

It's pretty rare for a well-diversified portfolio to lose value over an eight-year period. Longer than that, it's rarer still. Usually, as you say, such a portfolio will do quite a lot better than fixed interest over the long haul.

All of this would be academic if you were Nervous Nellies who couldn't cope with the volatility that comes with shares, property and other investments. But that's clearly not the case, so I think you can stick with what you've got in the meantime.

Once you actually retire, you will probably want a steady income from at least some of your investments.

Even then -- as long as your savings are substantial -- you could get that income from dividends and selling some of your capital as you need to.

Another good option at retirement is to buy an annuity that grows each year to allow for inflation (see above). If you put enough into an annuity, you could get a stable, almost risk-free income flow sufficient to cover your basic needs.

Then you could keep the rest of your money in shares or other more volatile investments without being foolhardy.

Bonds, as you point out, are riskier. But if you go for several companies with good credit ratings, you will probably be okay.

There is, however, the other risk with these fixed-interest investments that interest rates will rise, leaving you stuck at below-market rates.

You can avoid this by going short term. Over time you will miss out on the higher rates generally offered for longer-term investments. The best way to cope with this is to favour the long term, but vary your maturity dates.

All of this can get a bit complicated, though.

If you have the savings and the courage - and if, like me, you like simplicity - I think the annuity and shares option may suit you.

Footnote:

Annuities work well in many other situations, including those of several other readers.

One man and his wife, for instance, are in their 70s, with no mortgage, $800,000 of savings, and "no particular obligation to leave money to anyone."

The reader says: "We would like to invest our assets into whatever would be the least bother, particularly as we get older and perhaps a bit gaga."

The simplicity of an annuity would make it ideal for them. Once it is set up, it just keeps coming into your bank account every month.

Another reader has an elderly mother in a rest-home. She is considering selling her mother's house to get rid of some debt and cover the rest-home fees.

"Are there investments available that pay interest and capital on a monthly basis?" she asks.

That's exactly what an annuity does.

And, at her mother's age, she should be able to get a good deal.

A good insurance broker can get you quotes on annuities.

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