When $1 million isn't what it was

By MARY HOLM

Q: We have been running a small seven-day-a-week business for most of our working lives and have planned to sell up and retire next year.

We felt that we have worked hard for long enough and, now in our early fifties, we are due a few weekends off!

On the sale of our business we reckon on having $900,000 to $1 million to invest. A few years ago we thought this would be a piece of cake. But now we are not so sure.

It seems with the current fad of offshore investing that the big returns of yesteryear appear rather meagre at the moment. (We have $10,000 in an Australian-managed Asian share fund that has been steadily diminishing in value.)

We initially thought that with little experience in investing we would be best to hand the lot over to a "money manager". But if they manage only an average return of 6 per cent, and cream off 2 per cent for themselves, we can live off the return but have none left to reinvest or splurge on trips etc.

Maybe we would be better off to manage it ourselves. Is it all that difficult to match their returns?

Or stay put and work a bit longer at what we know best?

This is a major decision. We are tired of what we are doing, but the water looks cold out there at the moment.

Have you any thoughts?


A: I certainly do. And the first is that I'd love to see you retire next year. You've earned it.

But whether you should do so depends on how luxurious a retirement you want.

Assuming you've got a mortgage-free home, you should be able to live pretty comfortably on $1 million of investments.

But, as Howard Hughes once said: "A million dollars is not what it used to be."

This is especially true when you realise that you might both live another 40 years, or even more.

That means you need to take care about eating into your capital.

Even if you just live off returns on your investment, those returns, and your capital, will buy less and less over the years because of inflation.

One way to keep all of this under control would be - as regular readers already know - to buy an annuity.

Let's say you retire now, both aged 53.

If you gave an insurance company $500,000, they would give you monthly payments starting at about $2250 a month, or nearly $27,000 a year, says Tower.

When the first one of you dies, the payments would drop to two-thirds of that amount, until the second one dies.

The annuity would also include a guarantee that, if you both died within 10 years, payments would continue to your estate until the 10 years was up.

To help you counter inflation, you could add automatic payment increases of 2 per cent a year. Your payments would start out lower, at $1705 a month, or about $20,500 a year, but over the decades the annual increases would make a big difference.

At a glance, I'll admit that these deals don't look particularly attractive.

But you don't have to pay tax on the money, because the insurance company has already done so.

Also, an annuity eliminates lots of risks: You won't outlive your money. You'll have guaranteed income regardless of what happens to market returns. And you'll have some inflation protection.

That's all good stuff for your old age.

An alternative is to put off buying the annuity for some years. Your payments would then be bigger, as the insurance company wouldn't expect to pay out for so long.

If, for instance, you were both 65, you would start at about $2320 a month, or $27,800 a year, with 2 per cent annual increases. At 70, you would get an even better deal.

What about the rest of your money - and perhaps the annuity money until 65 or 70?

For all your reservations, I think you should use a financial adviser. You're good at accumulating money, but your expertise is not in managing it.

True, some advisers will bring you rather low returns and charge rather high fees. But you can do something about both.

First, returns. You need to realise that, if you want high returns, you must go into volatile investments, such as shares or share funds.

Volatility means you'll go backwards sometimes, as you have in your Asian fund. Hang in there. There's a big chance your fortunes will change. It's just that nobody knows when.

On your other investments, if you're not prepared to see their value fall sometimes, you'll need a conservative strategy.

And with that, you'd be lucky to get 6 per cent over the years in these times of lower returns on everything.

A good financial adviser will help you work out how much volatility you can cope with.

On the strength of that, she or he will set up an "asset allocation" for you. That says how much of your money should be in cash, fixed interest, property and shares or share funds.

If the allocation is done well, you should be able to stick with it for years, changing only when your needs change, not when market trends change.

History tells us that, after a while, market trends swing back again. Switching assets to follow them just turns out to be costly.

You will, though, need to make some adjustments when your allocation gets out of whack because one asset type has done better than others.

Your financial adviser can do that for you. But she or he doesn't need to charge 2 per cent - and especially not 2 per cent of $500,000 or $1 million.

An hourly rate, for just a few hours a year, should be sufficient.

Apart from that, every few years, the adviser and you should review your situation, looking at your spending patterns, changing taste for risk and so on. Again, I think it's best if they charge an hourly rate.

Ask friends and professionals you know for recommendations on advisers. Then discuss openly with the advisers how they will charge you.

Be prepared to pay well for good initial advice, but not for more ongoing work than necessary.

Having said all this, let me add that, if you really want a luxurious retirement, maybe you should continue to work a few more years, but part-time. Hire someone else to do some of the days.

One last point: Offshore investing is not a fad. In the past, New Zealanders did too little of it. We probably still do.

Despite what's happened in the last couple of weeks, I'm still convinced that we should have a large portion of our share investments - which should always be long-term investments - offshore.

Q: Now that Britain seems committed to converting to the apparently shaky euro in January 2002, I and no doubt many other readers worry about a significant fall in the NZ-dollar value of income sourced over there.

What is likely to happen please?

A: I don't know. And nor does anyone else.

For all that, BNZ chief economist Tony Alexander is often asked what his best guess is, so I put your question to him.

At this stage, he thinks the British pound is overvalued and the Kiwi dollar undervalued.

"So over the next two years we expect the NZ dollar to appreciate against the pound, to around 0.31 mid-2002, then maybe 0.33 mid-2003."

But, he adds, "the big factor for the pound is whether it enters the euro.

"I don't know where the letter writer got the idea the pound will enter the euro from January 2002. That's incorrect. There are no plans for entry, and the UK public remain firmly against it, according to polls."

Alexander doesn't expect entry before 2005. "Furthermore, it is not guaranteed that there will be entry in even the next 10 years."

He goes on to say: "Whenever speculation of entry occurs, the pound weakens in expectation of Government efforts to get it down to achieve a more competitive (for exporters) entry level.

"Once such speculation ends, the pound goes back up again."

I've quoted Alexander before on how unpredictable exchange rate movements can be, and how wrong his and others' forecasts can turn out to be.

"With the extra element of pound entry to the euro thrown in, forecasting the pound is even more difficult than usual," he adds.

So where does all this leave you?

If you want to spend some of your British income over there, on holiday, or on British-made products, it's less risky to have that income in pounds or euros.

But if you want to spend it over here on locally made goods and services, and if you can move your investments here, perhaps you should gradually make that move.

You could, say, move a quarter of the money now, a quarter in six months, a quarter in a year and a quarter in 18 months. Or spread it over two or three years.

That means you won't have moved all your money at what turns out to have been the best rate.

But nor will you have moved it all at what turns out to be the worst rate.

* 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.