Sloping off with the kids' inheritance

By MARY HOLM

Q. Quotes from

last Saturday's column

: "The trouble with capital is you cannot predict how long you are going to live."

"Too many people live too poorly in retirement so that their better-off children can inherit."

More people now SKI (spend the kid's inheritance).

Is there any (insurance) company that offers an annuity for those who want to spend all their assets entirely to coincide with the time of their death?

Such a company would provide monthly payments based on the cash capital paid by the client and the value of their dwelling, which they continue to occupy. The company would become the dwelling owner on the death of the clients.

The client might retain a small cash fund for emergencies. Health insurance and the funeral costs could be part of the deal as well.

This product would be very attractive because all the clients' worries would be covered (and their offspring need never know). The clients could enjoy giving their excess monthly income away as they see fit.

Insurance companies are in the business of spreading risk, so for every long life there will be a short one.

Do you know if such a deal exists somewhere?

(PS: My wife and I have no kids, so we are in the market.)

A. Dream on.

The insurance companies seem to have enough trouble offering ordinary annuities that are good value.

And, while there are one or two companies offering or planning to offer home equity release products similar to the one you describe, that market is not yet well-developed in New Zealand.

As for adding health insurance and funeral costs, I haven't heard of that.

Still, you're in good company. University of Auckland economist Susan St John, an expert on superannuation and related issues, describes "an attractive annuity product for middle income New Zealanders" in a recent paper.

Among its features, it would:

* "Allow, in suitable cases, the use of part of the equity in owner-occupied housing for the annuity purchase."

* "Include insurance for catastrophic care costs."

That's fairly similar to your idea.

Other features include: good value for money, inflation-proofing and gender neutrality.

St John adds: "It is possible that a life annuity plus long-term care insurance purchased with a single premium at age 65 or 70 might capture a wide pool of annuitants.

"Those who die early and do not need long-term care, along with those who live into old age but do not need long-term care (the vast majority of those who survive) subsidise the ones who do need care."

The insurance company's risks would be somewhat balanced with such a product, she points out.

People in bad health, who are likely to need care, are less likely to live a long time and so won't cost so much in annuity payments. Those in good health may receive many annuity payments, but they are less likely to need care.

Another attraction: money put into an annuity is no longer available for inheritance. But if the retired person puts other money aside for inheritance, and family members know that won't be eaten up in long-term care, they may be happy with the arrangement.

It all sounds pretty good.

St John adds, though: "It is evident that the industry cannot provide a product that meets most or all of these criteria on their own.

"Examination of annuity markets and reverse mortgages overseas reveals that the state usually plays a substantial role in the successful development of these markets."

She goes on to suggest ways the Government could support the annuity market. Her paper was written for the Periodic Report Group, which is due to report to the Government on retirement income policies by the end of the year.

I suggest you watch to see if the report picks up on St John's ideas. Maybe, then, you could stop dreaming and start lobbying for their implementation.

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Q. I've checked out the calculations behind your correspondent who needs $40,000 a year for 10 years to retire on.

It seems to me that both you and the website you quote are ignoring the effect of NZ Super.

I've done this on the attached spreadsheet by including the present after-tax super payable to a married couple, escalated by your inflation figure of 3 per cent. I've also escalated expenditure at the same rate.

You have taken income on capital at the same rate as inflation, which I think is a bit modest. My table has increased this to 4.5 per cent after tax.

By a process of trial and error I have then calculated the capital required at the start of the 10-year period as $225,000 - much less than the $390,000 in your article.

This of course applies to a person who is already retired, whose state pension is more or less assured.

Others now in the workforce and planning some decades ahead may not have the same confidence in having the same level of NZ Super when it comes to their turn to collect it.

A. I agree that people already retired or near retirement should include NZ Super at current levels in their income calculations. And I did that in at least one recent Q&A.

The correspondent you're talking about, though, wanted $40,000 over and above NZ Super, I think.

And the website excludes NZ Super, as it's American.

As far as the return on investment goes, 3 per cent after tax is indeed quite conservative. But when we're projecting well into the future, I don't like using a higher number because it might not happen.

New Zealand interest rates are high by current world standards, so they could well fall over the longer term.

Of course investors should be able to get a bigger long-term return on shares or property, but many in retirement don't wish to put much of their money into those riskier asset classes.

Still, your 4.5 per cent is not a silly number.

Your calculations will no doubt be comforting to many, so good on you.

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Q. Two comments about last week's items:

* Kids do leave home, but they (or their belongings) keep coming back.

We have a smallish three-bedroom townhouse, and four sons, all in their thirties. All have left home ...

One has just gone overseas, and mum and dad have been nominated to store his chattels. Another did his OE and has just moved back in again (with all his chattels) to save money.

His brother returned from his OE earlier this year, stayed with us for six months, is now flatting (furnished). Guess where he has his chattels? Yep, at mum and dad's.

We must have done something right/wrong with the other lad. He left and apart from short visits, remains left.

However we are blessed with four wonderful sons and we can't wait to become a burden on them.

* Re your reader who reported $13,000 for a year's living expenses, where did that expression "two can live as cheaply as one" come from?

Our annual living expenses for 2001 were $27,030 (full details attached). How do I know this? I had a "mild obsession" when I received Microsoft's Money program a few years ago.

Now, it's an excellent program for recording and controlling expenditure, but after three years recording every cent spent I was unable to enjoy having a coffee or a pie knowing that when I got home I just had to log it.

What a huge burden was lifted once I decided to stop keeping every detail.

Okay, we have two cars, I play golf, my dear wife embroiders beautifully and plays bridge. But we are not really extravagant. We just have to save for our kids' retirement.

A. I bet, when your sons go through that stored stuff a few years later, they will give away or throw away at least half of it.

Maybe the occasional review by them might be in order?

On keeping track of expenses, American poet Robert Frost (1874-1963) said it best: Nobody was ever meant to remember or invent what he did with every cent.

* * *

Follow-up: Two weeks ago I suggested to a correspondent with two rental properties that it might be an idea to put both houses on the market, at fairly high prices, and sell whichever goes first. Then, perhaps, sell the other a year from now.

She has since written the following:

Q. I intend to put one of the houses on the market after Christmas and once that is sold, then seriously consider selling the other one.

The only reason I don't want to put them both on at once is in case my tenants take fright and I end up with two empty houses. Currently both sets of tenants have been excellent and been in residence for 2 years and 2 1/2 years respectively and I don't want to lose them any earlier than I have to.

However, I will do what I did on a previous property (my parents' house that I sold a few years ago): ask the land agent to market the property as an investment with sitting tenants. I found that worked well for all parties concerned last time.

A. Good point. It's fine for me to blithely suggest putting two houses on the market, but I didn't take into account that they are people's homes.

It's hard on tenants if their house is on the market. It's not a bad idea to compensate them for putting up with buyer inspections and open houses by reducing their rent.

And this is not just kindness.

The last thing you want is to have to them bail out, leaving you unable to replace them for such a short term, but possibly facing a long rent-less settlement period requested by the buyer.

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Correction: What a difference a minor change can make.

In this column two weeks ago, I originally wrote: "I'm not saying house prices will fall.

A subeditor changed the emphasis, so it read: "I'm not saying house prices will fall."

What I was trying to say is that I'm not certain prices will fall, although I think they might.

Why does it matter? If house prices do, in fact, decrease in the next few years, I don't want anyone coming back to me and saying I gave them confidence that that wouldn't happen.

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