The fallacy of downsizing

It’s supposed to be the comfortable cushion for baby boomers and many approaching retirement:  sell the family home and downsize.

But recent research shows that, for many people, downsizing may only “buy” three years of comfortable retirement living.

With property values having rocketed up in recent years, it has always sounded like a good scheme – but now financial services experts have warned that downsizing, on average, is not always the key to the door of a comfortable retirement.

With a retirement age of 65 but people increasingly living, on average, to 82 or beyond, downsizing is by no means definitive, says Richard Klipin, CEO of the Financial Services Council (FSC).

Their research showed that enhanced life expectancy can also mean even those who have planned for their retirement can run out of money after 10 years – and live the rest of their lives with only the national superannuation pension as income.

“Thankfully, in New Zealand, we do have a system which keeps the wolf from the door for most people,” says Klipin. “But it is not a generous lifestyle and many people can end up in a [financial] place they don’t want to be.”   

The 3- and 10-year figures come from research undertaken last year to estimate the total wealth New Zealanders expect to take into retirement and whether they are overestimating or underestimating their financial well being after stopping paid work.

“What we found, when we surveyed 2200 people, was that the average outcome for people downsizing their homes was that it only gave them 3.3 years. Most will either be moving to a retirement home or to a smaller house – so they will be using some of that property value to re-enter the market [incurring real estate and legal costs on both transactions],” says Klipin.

“We also found nearly all older New Zealanders will be living on the pension alone after just 10 years – indicating more education is needed on investment options available during people’s lives. About 40 per cent of the elderly we surveyed regretted not having more financial advice.”

So what would they be advised to do? Older people still working need to make the most of opportunities to grow a nest egg and increase income in retirement.

“People tend to cash up, go on a holiday, buy a car and update the white goods – and then they say: ‘Right, we’re ready for retirement’.”

Unfortunately,many aren’t. With Kiwi Saver, New Zealand is developing an accumulation culture,says Klipin, but there has been little in the way of “decumulation planning” –where retirees received a regular income over and above the pension.

“So as the number of over-65s in Kiwi Saver grows,” says Klipin, “they will expect the financial services industry to provide more advice on re-investing savings and funds raised from downsizing.”

One potential tool is life income funds, a comparatively new financial product here.It uses retirees’ capital to provide a regular income – for life, using a mix of investment and insurance.

The money is invested and a fixed sum paid out to the retiree at regular intervals, minus an annual fee and tax.

An insurance premium paid from their Kiwi Saver fund ensures that, should the retiree run out of capital before they die, they will continue to receive the regular income for the rest of their lives - paid out of insurance. Any capital left when the person dies is paid into the estate.

Klipin say she is not advocating any particular product, saying retirees need to  do their research and take professional advice – but adds: “It helps to answer the great existential question: How long will you need funds for? I mean, who knows their date of death?”

Life income funds can provide certainty for retirees, but he says they still need to check that any such product gives them that financial longevity, whether it is subject to interest rate shifts and is not inflation-proofed, and to ensure any capital left after death reverts to the estate. 

However such funds may assist many who were over 65 and retired and thought they needed $655 a week, after tax, to live comfortably – but who were only receiving $437 a week, a shortfall of $218, according to the FSC research.

“Of course,there is a cohort of New Zealanders who have invested wisely or sold a business or otherwise provided for their retirement,” Klipin says.

“Some are doing very well – but our research showed that will not be so for many.”

*Britannia’s Lifetime Income Fund combines investment with insurance to give you a retirement income for life. No matter what happens to interest rates or financial markets, your income is insured to last the rest of your life. For more information: https://britanniafinancial.co.nz/lifetime-income-fund. Disclosure Statements for Britannia’s Authorised Financial Advisers are available on request and free of charge. Phone 0800 663 663. The Product Disclosure Statement for the Britannia Retirement Scheme is available from Britannia Financial Services Limited at www.britanniafinancial.co.nz