Issues

There are three major concerns for this generation. Income, Health and Time. Each a symptom of habits and behaviours of the previous 40 years. As Baby Boomers advance towards more time and less money are there things which can be done to enhance or improve lifestyle options over the next 30 to 40 years?

Rationale

The first and most important understanding is of time. How much is left. How many years? This is a habit of thought. Attitudinal. Do the facts with regard to longevity become superceded by bias and belief. In other words, because parents or grandparents lived to the average lifestage of the day does this generation consider old age to be 80? Whilst the reality is that women outlive men statistics tell us that one partner ‘of an average couple retiring at age 60’ has a 50% chance of living a further 30 years. That creates two problems. The person who formerly controlled the ‘investment’ decisions has probably passed on (quite common in my office as more and more widows seek advice). Secondly, a 30 year retirement is a long time. Time in which the loss of purchasing power affects lifestyle in a negative way. A 5 % inflation rate doubles the cost of living after 15 years. When inflation is low, as it is today, interest rates are low. This is a double whammy for retirees. Fixed income investment yields (interest rate returns) are minimal and the cost of living for retirees is greater than 5% for basics such as: home maintenance, retirement home costs, medical care, travel (family can often be many miles away), quality food, rates and insurance.

The second issue is health and the medical care which accompanies it. Good health for some is the product of good genes and healthy habits. But not everyone is that lucky. In most families at least one member drew the short straw. For some families, height is too short for weight. Both the healthy and the unhealthy will have a price to pay to remain mobile and personally capable. The state will ultimately assist the incapable but the journey of unwellness is not pleasant (dealing with institutional welfarism, medical practitioners and community assistance groups). Nor is it inexpensive. We lucky ones may believe that ‘the state will pay’ – not the case in many instances. Lack of money usually accompanies this group due to a history of medically affected employment.

The ‘healthy’ lifestylers and physically active will usually enjoy a retirement of two halves. Depending on income – the first half (15 years) – travel, hobbies and family. The second half (15 years) – a lifestyle determined by money, wellness, mental and physical capability. The whole ‘game time’ is not inexpensive – both halves roughly equating but expenditure being allocated in different ways. Fun time – staying alive time.

Finally money. Income.

If we know there is a 50% chance that one partner of an average Kiwi couple is likely to live beyond age 90 – and we also know they are likely to experience a game of two halves – how much money/income is needed and how does it need to be invested to provide a guaranteed affordable lifestyle. Of course there are always extraordinary possibilities – good or bad, which could affect these probabilities. In the normal course of events however what are some reasonable assumptions and how might the retiring couple plan for a comfortable retirement.

A $60,000 income, net of tax will require $740,000 invested for 30 years with a 4% ‘real return’ (after tax, fees, inflation). This assumes a $20,000 inflation adjusted government super is also ongoing. That is – 40k from personal investments and 20k from the government. How many current Baby Boomers have $740,000 invested – not many. Just as an aside – the $740k will be gone after 30 years. The kids might inherit the house, unless Mum had to re mortgage it to maintain her lifestyle. For a 4% real return, money will need to be invested in growth assets (shares and property) – term deposits and bonds will not deliver the projected long term outcome (using historical data).

Of course there are no guarantees either that the next 30 years will deliver a 4% ‘real’ result – there being no guarantees with capital markets or economic and political environments.

Recommendations

• Start planning before age 50 – take advice.
• Eliminate non-deductible debt (pay the home mortgage off as quickly as possible).
• Understand income, expenditure, net worth, investment targets – measure and review annually.
• Practice healthy living.
• Communicate with the family about financial issues and estate expectations.
• Do your planning with an expectation of living 30 years in retirement.
• Think of the costs involved with retirement being a game of two halves.
• If you want more than a $60,000 income you need more than $740k invested.