Tread softly over halving home's value

By MARY HOLM

Q: We wish to retire at the end of 2002, when I will be 65 and my wife 56.

Our estimated net worth will be about $400,000 in our house, plus $30,000-$35,000 in a boat and a share in a small business (which wouldn't sell too easily, but could be worth $50,000-$75,000 for my share), and a car.

Our plan is to sell the house and split the $400,000 into a $200,000 house and $200,000 in investments.

We believe that $200,000 invested at 5.7 per cent (is this viable?) would bring a gross return of $11,400 a year, and that NZ Super at the "living with others" rate would return $12,975 gross a year.

Our lifestyle includes running a boat, at $3000 net a year. We believe we could live on $35,500 gross a year, or $28,000 net.

Is $25,000 net (excluding the boat money) reasonable for a retired couple to live on?

The above I calculate to be $11,000 gross a year short of the $35,500 gross that we want to live on.

I have four options to cover that $11,000: work for it; take it from the business; take out a RAM (reverse annuity mortgage) on the house; or get a higher return on all or part of the $200,000 invested; or more than one of these. Your advice would be most appreciated.


A: Are you sure you'll be happy halving the value of your home?

New Zealanders tend to put too much of their savings into their homes, and I applaud people who trade down to cheaper houses. But $400,000 to $200,000!

Still, you live in one of Auckland's more expensive suburbs. You could probably buy a smaller house of similar quality in a small town for $200,000 - as long as you're happy to make such a move.

If not, I suggest you look around at what $200,000 will buy in your chosen location.

Many people think that, simply by moving to a smaller house in retirement, they will free up lots of money.

But the type of smaller house popular with retired people - something newish, low-maintenance and near facilities - can cost as much as the bigger suburban family home they are selling.

Assuming you do move to a $200,000 place, you ask whether $25,000 after tax will be enough for you to live on.

Many people get by on not much more than NZ Super, so obviously you'll cope.

But retired people's wants and needs are as varied as everybody else's. Only you know what you would like, so you need to draw up your own budget.

Look at your incomings and outgoings now, and make suitable adjustments. You might, for instance, expect to spend less on transport in retirement, but more on health.

Turning to your four options for making $11,000 a year, obviously working is one possibility.

You - and especially your wife - are retiring relatively young, so some part-time work might not be too much of a burden.

The business might also be a good source. But, if the $50,000 to $75,000 you have tied up in it generates $11,000, you would be doing extraordinarily well.

I wouldn't hold out great hopes on a RAM. (For other readers, that lets you make use of money tied up in your home. You get regular payments now, but lose some equity in the home when you finally sell.)

It's a great idea. But the market for such products in NZ is limited. And you wouldn't get much on a $200,000 home.

What about your $200,000 investment? If you hope to make a higher return on it, you would have to take more risk.

That means going into either:

* A non-bank, non-Government fixed-interest investment, such as corporate bonds, or

* Property, shares or a property or share fund.

Corporate bonds and the like do, sometimes, go wobbly. But if you choose conservative bonds, and spread your money over several companies, it might be a risk worth taking.

Then again, less-risky bonds won't bring in all that much more, after tax, than a long-term term deposit or Government bond.

In property and shares, you can reduce your risks considerably by investing in a fund that holds many assets.

Even so, returns will vary and will sometimes be negative. Given that you want regular income, and that you don't sound like big risk-takers, I'm not sure that a property or share fund is right for you.

Regular readers won't be surprised to see me make another suggestion: that you put, say, $100,000 into an annuity.

You pay an insurance company a lump sum, and they give you back monthly payments until you die.

It's important to note that you don't have to pay tax on the payments, as the insurance company has already done that.

With $100,000, for instance, Tower currently pays about $515 a month - which is $6180 a year, already taxed - until the first one of you dies. Then the survivor gets two-thirds of that for the rest of his or her life.

You'll notice the payments aren't all that much higher than bank interest. That may seem surprising, considering that they include a return of your principal.

It's partly because you two are fairly young annuity purchasers. The insurance company is likely to pay you for many years, and it takes all that into account.

If you put off buying the annuity for five or 10 years, you would get considerably bigger monthly payments.

Another point is that, no matter what happens to investment returns in future, you will get the same payments.

That's certainly not true of other investments. It could mean you'll miss out on future high returns. But you'll be beaming if interest rates drop to 2 or 3 per cent.

And experts tend to think returns will fall, rather than rise, over the next decades.

One other attractive feature is that you can get an annuity that will rise by a specified percentage each year, to help you keep pace with inflation.

If, for instance, you got the above annuity with a 2 per cent increase each year, it would start out at only $407 a month, or $4884 a year. But each year it would grow.

I don't know of any other investment that does that. Again, it gives you security.

Why $100,000 and not $200,000 into an annuity?

I think the rest should be in a term deposit or Government bond, to give you access to it in an emergency.

Or perhaps $50,000 would do for that, and the annuity could be $150,000.

For all their strengths, annuities have their weaknesses, too. See the next Q&A.

First, though, one more issue: you're not correct when you say you'll get the NZ Super at the "living with others" rate of $12,975 a year, before tax.

That rate is now $13,526 a year, but it doesn't apply to your situation, says the Ministry of Social Policy.

A married person whose spouse hasn't yet qualified for NZ Super has two options. He or she can get:

* The rate for a married person, of $11,148 gross a year. This will not be affected by any other income the couple receives. Or,

* The rate for a couple that includes a non-qualifying spouse, of up to $21,182 gross a year. This will be reduced, depending on how much other income the couple have.

The ministry suggests you contact a Work and Income office, to work out which option will give you higher payments.

Q: Re your advice in a column a while ago on annuities, I would like to suggest an addendum.

Money locked into an annuity and the return it gives are also vulnerable to any change in Government policy.

For example, reintroduction of the surcharge or an income/asset test, as now applies in Australia, could see the annuity seriously eroded.

On the other hand, retention of the lump sum earning a modest percentage in a bank investment affords some flexibility and control.

You can at least access and spend the money to the extent that it does not influence any Government pension entitlement.

But as you often say, we must each weigh up and decide what is best for us.

A: You're quite right that you lose flexibility when you buy an annuity.

And it's one reason I think it's best not to put more than, say, a half or two-thirds of your savings into one.

On the other hand, you gain security - that you won't outlive your money, and that you won't be hurt by falling investment returns.

And in the world of investments, there's often a trade-off between security and flexibility. (Come to think of it, you get that trade-off in romance, in employment, and so on. Perhaps it's a universal truth!)

Still, as you say, there is a threat to the security of annuities. A future government policy shift could make them less attractive.

I would expect, though, that such a change would similarly affect bank savings. I don't see why a Government would pick on one asset over another.

You seem to be saying that if you had money in the bank and a Government change made that less desirable, you could always spend the money.

True. But surely you would be cutting off your nose to spite your face.

It's quite possible that NZ Super payments to the wealthy could be reduced in the future, via a surcharge, income and asset test or similar. It makes sense to me.

But I can't imagine any policy change that would make people with retirement savings worse off than - or even anywhere near equal to - those without savings.

Think of the message that would send to younger people.

Even politicians aren't that silly.

Remember, too, that with a growing proportion of our population going into retirement, politicians will take care not to make enemies of the retired.

Life's a gamble. Who knows what will happen?

When I retire, I'm not going to miss out on the advantages of annuities because of worryies about possible political changes.

Q: (1) Thanks for your column in the Herald. It's one of the nicest things about Saturday mornings.

(2) I am fascinated that anyone would have the arrogance to sign him or herself "Yours enjoyably". (See last week's Money Matters.)

Are they really so certain that you would enjoy having them?

But perhaps their knowledge of English grammar is not as great as they think.

A: Thanks to you, too!

I usually edit out people's nice comments at the beginning of letters. I appreciate receiving them, but I don't think the world needs to know about them.

This time, though - just because it's springtime - I decided to make an exception.

As far as "Yours enjoyably" goes, I didn't really think about it much last week.

But you're right. It does mean that the letter writer is enjoyable.

And given that he was telling me off for being disdainful and accusing me of being wrong, his letter wasn't all that uplifting!

For all those who are wondering what on earth this has to do with Money Matters, it doesn't.

But it's enjoyable.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.