Retirement planning essentials

Welcome to another presentation and thanks for joining us.

today we'll be discussing retirement and how to plan for your retirement.

Different considerations and things like that, and helping you to outlive your money in style.

Before we get into today's subject, a bit about myself.

I'm an independent financial advisor which is a rare breed in this country.

Most advisors are paid commission for selling certain products and services whereas our services are completely independent, free from conflicts of interest.

we're not paid by any product providers or anything like that.

So we can offer conflict free unbiased advice.

I'm the founder, owner and operator of youf Money Blueprint.

We've been in service for almost 10 years now.

I'm the author, of Money Lessons for My Younger Self which is a book of diary entries of things that I wish I knew when I was younger that would have saved me a lot of time and money.

You can find that book for sale on the website.

there's a website there in my email if you need to get in touch as well as my phone number.

I'll bring those back up at the end of the presentation as well should you need anything.

In terms of the business as well.

We specialize in investment planning, retirement advice and just general hashing out of scenarios to help you make the best decisions for your life.

Things like helping with decision of going part time or not or maybe retiring early or not.

Just a decision to retire, maybe buying a rental property or not, becoming a business owner.

All those kinds of big life decisions.

We can help you decide on the best course of action.

Today's layouts we'll quickly run through starting with the definition of retirements.

Then we'll get into the why it's important to plan for retirement.

Then we've got different types of retirement, very important in this day and age.

retirement is not the same as it used to be.

So we'll discuss that in more detail.

Then we'll get into the nitty gritty of how much money you might need to retire.

Then we'll get into the impact of small changes in expenses and income and how that can make drastic changes in the results of your planning.

Then we'll get into some investment considerations that you could be making in regards to your retirement.

An important concept is the sequence of returns risk.

We'll go into more detail about that later.

how to draw a paycheck in retirement using the bucket system.

And then another concept that I regularly see in my financial planning services, clients being asset rich but cash poor and how to think about that and plan for having more cash in retirement.

we'll go over compound interest and how important that is towards the end of your working career and how, it can be something that a lot of people rely on, but it can fail at the time that you need it.

Then we'll get into the importance of preparing for the non financial aspects of retirement.

A lot of people think about just the financial side of things, but there are some important non financials that are equally, if not more important.

And then some final thoughts.

So what is retirement?

I feel like it's a controversial topic.

a lot of people think if someone's working, even though they might have enough money saved to retire, they feel like that person is not retired just because they're working.

I like to think of it a little bit differently, where I consider it the absence of needing to work, not necessarily the absence of work.

So a slight difference there.

the important thing is having enough money saved, up, otherwise known as financial independence, where you don't have to work again if you don't want.

But just because someone chooses to shouldn't make them not retired, in my opinion.

And duration is getting longer as we live longer.

So this requires careful planning as well.

you know, decades ago, people on average were living in their, to their 70s, whereas now we're living well into our 80s.

So longer, longer lifespans means more years in retirement and that means more money needing to be saved.

So that, that needs careful consideration, as does the fact that I think it's now harder than it used to be, to be honest.

mainly due to house prices.

they're so much more expensive than they used to be.

Even on an inflation adjusted basis.

People are buying houses later.

And because of this, people are having families later.

everything's getting pushed down to later, which means there's less time to save at the tail end of people's careers.

mortgages being paid off later, kids are out the house later.

So that's making it more challenging to retire as well.

So you've got that landscape to consider too.

And that's all making it more difficult to retire.

I've listed a few things here on, on why it's important to plan for retirement.

Starting with simply just to be able to buy things or to, to fund your goals.

You know, we have grand ideas of what we want to do in retirement.

It'll be nice to have the money to, to do those things.

So yeah, that's very important.

as well as that, yeah, obviously you don't want to run out of money before you run out of life.

So yeah, I mean it's pretty simple and it's a fear of many people as well.

a lot of people actually save way more than they need because of this fear.

But it's a very real fear and it'll be a pretty miserable existence.

You know, if you do run out of money before you run out of life, it's important to plan for retirement as well, just so that you can invest appropriately.

If you're not considering retirement in your investment decisions, you're probably either going to take on too much or too little risk.

so yeah, it's really important to get that balance right.

As discussed in the previous slide as well, life expectancy is continuing to rise as we live longer.

That's more years that we need to fund.

So that makes our retirement planning critical.

When you're planning for retirement as well, you tend to have better health.

not just financial health, but also mental and physical health is too.

When you're less stressed about money, that does translate to better mental and physical health.

So it's all tied together and the opposite of not having a good plan is, is being stressed not just financially but also mentally and physically as well.

So yeah, take care of your money and the mental and physical side of things will be taken care of too.

Hopefully if you plan for retirement as well, you get to live your desired lifestyle and retirements, you don't have to cut back too much.

the more you plan for things, the more you can say yes to and you know, live, live that golden chapter of your life the way you want to live.

If you don't plan then you know, you may miss out on some of those things.

Very important thing with planning for retirement is so that the power is in your hands of when to retire.

There's around half of people that don't get a say and when they retire, might be through a health issue, might be an employer saying soonara.

could be a number of reasons why you're no longer able, able to work, could be needing to help out family, and that's forced retirement that's retiring when you don't want to or didn't choose to.

Whereas if you plan for retirement, more often than not, you can choose when to retire.

And if, one of the forced retirement did happen to you, then at least you've had a plan to get to where you are so you're in a much better position than you'd be otherwise.

And finally, just to ensure you aren't a burden on family, your kids have enough, commitments and worries without having to finance your retirement.

Seen situations where parents provide so much for their kids that they've made things so tight on themselves that either they have to cut back severely or they need help from their kids, which kind of defeats the purpose of helping the kids.

You know, you want to first live your best life, but you also don't want your kids to have to reciprocate, in terms of looking after you.

So at least not with discussing it.

I mean, some, some kids might be fine with it, but it should definitely not be a surprise.

it should be something that both parties are on board with or all parties are on board with.

So, yeah, just consider that side of things as well.

So here we have a table on the different forms of retirement.

the first one being traditional, which is what it sounds like on the tin.

Traditional where most people start work around age 20 or so, retiring around age 65 once you know, Kiwisaver and New Zealand super become available and then not working again, that's a traditional path to retirement.

Excuse me, the pros of this form of retirement, you don't need as much money as you would with other forms of retirement such as early retirement or semi retirement.

you have access to kiwisaver immediately.

So because you're not retiring or stopping work before age 65, you're able to access that money.

So you don't need to worry about a period prior to retirement.

And there's also just less chance of general boredom and mental, mental degradation when no retire from work.

If you don't have anything outside of work to keep you active both physically and mentally, then yeah, you can get bored and your mind can degrade.

So the cons of traditional retirements, you don't get as much say in how your time is spent.

Sure, once you retire, you've got all the time in the world, it's all good.

But prior to retirement there's that 45 year block where you're working full tilt and there's not much time outside of work.

So it's all work and not much leisure or play.

You've also got that 40, 45 year period of just workplace stress.

that can be different scale for different people.

but for a lot of people it's a long time to be doing something that's, you know, stressing you out or you're not enjoying.

And the final con is it's delaying your desired lifestyle.

A lot of people don't want to be working full time for 40, 45 years.

so any, any time committed to that is time not committed to, to what you'd rather be doing.

Next form of retirement is early retirement.

It's where you retire as soon as you can financially.

Basically.

Some people, you know, doing, doing so in their late 30s, early 40s, especially you're able to earn a high enough income.

the pros of this form of retirement are, you get that lifestyle freedom that you don't get with traditional retirement.

You can spend much more hours doing the things you'd rather be doing other than work.

Sure, you've, you've still got to work, you know, really hard to get to that early retirement stage.

But from that point on, yeah, you've got a lot of freedom, a lot of options.

And because you're not having to work as long as you would in traditional retirement, there's less work stress.

I mentioned tax benefits as well.

you know, once you stop work, you're on a low income so your investments and others, other things are taxed at a much lower rate.

And the other major pro is that with early retirement, you're hopefully still in good physical health, at least much better than you would be at a traditional retirement age.

And you can get to enjoy a much wider range of things than you could otherwise if your health was worse.

So yeah, that's a huge pro of early retirement too.

cons.

I mean, it might not really be a con for a lot of people, but you are leaving work and your peak earning years.

Generally, income tends to peak around early 50s for most people.

And you know, you're giving up, you know, a lot, a lot of money to territory early.

But at the end of the day, enough money is enough money.

You don't need more than enough.

So that might not really be a con for a lot of people unless things go sour once, you retire and then, you know, it's hard to get, get back into work at that point.

Another con is possible boredom.

If you've got nothing planned for your retirement outside of work, you could retire early and have nothing to go to and that's a long, long time to have nothing to do.

So yeah, best you sort that out before you retire early and have a plan for that.

It can be a long time before being able to access KiwiSaver.

So have a plan for your money outside of Kiwisaver so you can bridge that gap between early retirement and traditional retirement.

Your skills can become outdated.

If you do need to return to work or you do want to return to work, you may have to go into something completely different, something unexpected.

So just consider that, times change, you know, technologies come in and yeah, what you were doing might become outdated.

And finally, early retirement for many requires a, high savings rate.

So you may have to give up some things you don't necessarily want to give up to be able to achieve an early retirement.

So you don't want to compromise too much.

yes, just be conscious of that as well.

many retirements, that is things like get years, sabbaticals, it's quite often a short period of time you take away from work, before returning to work again.

So it's usually a period of between six months to a year, not, not much less than that or not much longer than that.

So generally it fits in that time frame.

And for some people it could be just one mini retirement during their careers.

For others it could be multiple, three, four or five.

So it's a good way of staying refreshed and yeah, just, just extending your work life just by being more energized and creating that work life balance that you desire.

So that's one of the pros.

it also, you know, can bring forward lifestyle goals.

So those bucket list items that a lot of people save for retirement, you can bring those forward and achieve those.

And a year off, for example, you get time, freedom much earlier in life than you would traditional retirement.

Having that year or six months to do things outside of work that you want to do.

You don't have to wait till age 65.

And as mentioned, you're never working too many consecutive years in a row.

By having regular mini retirements especially, you don't have to work so many years in a row.

You don't get that work stress, you don't get that burnout.

And also you get to enjoy those things outside of work that you want to.

There are of course cons to this path to retirement or this type of retirement rather.

you might need to work longer than, well you will need to work longer than you would for traditional retirement because you're taking one to more years off work.

that's a year not, not working that you need to fund an extra year.

It could be an extra two years.

So you need to work longer to recover those lost earnings.

And also you're interrupting compound interest as well from your savings.

So you know, one year of not working can equate to needing to work an extra two years just, just from that hit alone.

Just like early retirement, your skills can become outdated, especially if your many retirements are extended of say two years or more.

So just be careful of that.

And also career progression can become difficult when you're, especially if you're taking regular mini retirements.

I mean one mini retirement should be fine, but if you take multiple mini retirements it can be hard to progress in your career which might not be a major.

If you've got no ambitions to progress, that's, that's fine.

but yeah, someone who's regularly taking, taking breaks is, is unlikely to progress to the, to the highest peaks.

semi retirement.

That is where you've reached a point that your you know, happy enough with your savings that you just Want to, you know, coast a little bit, maybe slow down at work and achieve some of those things outside of work that you want to achieve.

And unlike many retirement, it's an extended period of time, hopefully all the way until traditional retirement.

And it's a mix as well between work and leisure.

So you haven't entirely given up work.

this is the path that me and my family have, have taken at the moment.

we've got a young family and we want to spend more time as a family, you know, enjoying, enjoying this time while the kids are young before they move out the house and don't want anything to do with us so much.

yeah, it's really important time in life we feel to be, to be a unit to enjoy things outside of work.

So it works well for us.

the pros of semi retirements, are there is a healthy work life balance, I believe, where you're not working too much, but you also don't have too much leisure time as well.

You get that stimulation from work too.

just like many retirement and early retirement, you get that time freedom much sooner than you would with traditional retirements.

Semi retirement can come before early retirement too.

So, you can even enjoy that time freedom sooner than you would with early retirement.

And compound interest still works pretty well, better than it would with early retirement because you are still working, so you're not having to fund as much spend, which means you don't have to disrupt your investments.

the cons, it can take longer to achieve early retirement, obviously because you're working less, your skills might become outdated again, just like many in early retirement.

When you're semi retired, you're not committing heaps of time to work, so you're not going to be first in line for promotions.

And you learning new skills and things like that, and you're still a little bit answerable to a schedule.

You are still working.

not as much as you would traditional retirement, but you still have that in some capacity.

And finally, temporary retirement, temporary retirement is where you have an extended period of time off work.

for a lot of people this can be in their 30s or 40s where they may want to stay home with their kids or just to focus on, on something different, just to, you know, revitalize and things like that.

typically it could be a period of 10 years or more even without work.

so yeah, the pros of the temporary retirements, you get to spend those best years of your life where you're the healthiest and most active pursuing your passions and not committing much time to work, if any.

just like many retirement, you're never working too many consecutive years.

So you might be working a huge, big chunk of years between your 20s and 30s, for example, and then you've taken a big break in your 30s and 40s before returning to work in your 50s, for example.

So yeah, you're never really working more than a decade or so.

And again, there's tax benefits of having no or low income as well.

the cons of temporary retirement requires a very high savings rate, just like early retirement.

To have so much time off work, you need to be a very good saver prior to that point to make that happen.

After you come back from your temporary retirement, you'll need to work longer than you would for traditional retirement just to make up for all those years of lost earnings and lost compound interests from the investments that you've had to take your money out of to fund your temporary retirement.

Again, career progression is more difficult once you take an extended amount of time out of work.

you're not going to be first in line for career progression promotions.

And again, your skills can become outdated anytime you're out of work.

With these methods of retirement.

there is, there's always going to be that risk.

And here we have just, a visualization of each form of retirement just for ease, ease of seeing how things work.

the colors, the peach, peach color is just your first 20 years of life where you're financially dependent, you're a kid, you rely on your parents and family.

the yellow section is work, the blue section is retirement, and the green section is a mixture of work and retirement.

So for traditional retirement, you can see working from say age 20 to 65 in the yellow and then retiring in the bluish purple from age 65.

Early retirement.

You can see the yellow is a much shorter period, so much less work, maybe only 20 years or so hopefully, but also a much longer blue or purple period, much longer period of retirement.

Mini retirement, you can see here, there's three mini retirements of possibly up to five years even.

so yeah, never, never working too many years in a row with the yellow and then regular, regular little retirements in the purple before retiring.

In this example, age 70, 75 at the end there, you can see it's a shorter retirement period than traditional retirement.

that's just because every year, many retirements taken that you need to save more money up to fund those breaks.

Semi retirement like early retirement, it's, you know, not, not Many years of work.

but in the green you've got a mix of work and retirement.

So you are working longer than you would with an early retirement but you're not working as many full time years as you might with an early retirement.

So there's that to consider.

And again the purple at the end, that's your full retirement.

Eventually, even when you're semi retired, you might decide you've had enough of work and decide to retire.

But that could be any age as long as you're financially ready.

And finally temporary retirement down the bottom there, you can see a 15 year work period in the yellow followed by a maybe a 15, 20 year temporary retirement in your 40s and 50s followed by a return to work again 15 years and finally retiring at the end there in the purple.

just like mini retirement, having to retire later than you would a traditional retirement.

So hopefully those visuals can help you decide on, you know, what might be your preferred path.

like I mentioned earlier, senior retirement works for us, but yeah, what works for everyone else will be completely different.

And to help with your decision as to what might work best for you, there's a few questions here that answering these will help you decide on your best path to retirement.

Questions like how much do you like your job?

The more you like your job, the more you're able to work.

So traditional retirement would work well in a situation where you like your job as would early retirement, believe it or not.

because early retirement does require a lot of hard, hard work before you get to retire.

So you need to enjoy your job for that path.

How is your health as well?

So if your health's poor, then the, I think one of the best things you can do is to slow down at work and spend more time concentrating on your health to improve that.

because if you don't have your health yet, you don't really have a great life.

So you need to prioritize that.

and if your health's poor, you know, past like many retirements to focus on that or semi retirement or even early retirement can be a good pass.

What's your family situation?

like I mentioned, we've got a young family, a seven and a five year old.

very important for me to spend a lot of time at home, helping with schooling, with sport, being actively involved in the kids lives while they grow up, teaching them and all that kind of stuff.

So semi retirement works very well for us.

yeah, if you, if you don't have a family or Maybe you've got older kids, then maybe you don't need to spend so, so much time at home and you can work, work more hours.

what are your goals as well?

You know, if you've got no, no big goals outside of work, then perhaps you are happy to truck along at work.

but you know, if you've got things you want to achieve, bucket list items, you might want to do that sooner rather than later if, you can't wait.

So you might want to take that temporary retirement or the semi retirement path.

Do you have strong passions outside of work?

A lot of people don't and that's fine.

if you don't, you know, you might not strive for a mini retirement that might not be very good for you because you'll just be, you know, wasting your time outside of work.

Unless you're willing to spend that time exploring things, outside of work.

yeah, but you kind of want, when you take many retirements and semi retirements, you kind of want your outside passions already decided.

then you're not, I don't want to say wasting time really, but it kind of is.

If you're spending that time you're not working, trying to figure things out.

you know, it can, can be a little bit wasted if, whereas if all that stuff's ready to go, you can just dive straight into it.

but yeah, there's nothing wrong with exploration as well.

especially if you've got no passions outside of work.

It's, it's really important to find that stuff and then you will have some strong goals moving forward of, of what you want to achieve and then you'll know which path is the best path moving forward from there.

Also, how much money have you saved?

Obviously, if you don't have much money to save, then you know, you can't retire early, you can't take those mini or semi retirements.

So the more money you have saved, the more of these options become available for you.

early retirement needs the most out of all of them, but everything else will need less and less saved.

So where you are on that, on that scale, depends on what path you're able to take.

So even if you want to take a path, you might not be able to.

So hopefully those questions have helped you decide on your, best path towards retirement or at least some things to consider.

How much money do I need to retire?

The big, big question.

a few common rules of thumb listed below that the first three especially, are no good to be honest.

You want to be basing the decision of how much you need to retire needs to be based on how much you're going to be spending in retirement.

It should have nothing to do with your current income, which a lot of these rules of thumb that you might see or read about are based on your income.

yeah, what you spend in retirement could be completely different.

For example, if you spend, if you're a good saver and save around, you know, 20, 25% of your income or more, then these income rules, are not going to help you at all.

They're really only for people that spend most of their money.

then there may be some relevance towards how much you need anyway.

Some of the common income ones, are 90% of your pre retirement income.

the theory is that you'll have a little bit less tax to pay and also maybe a little bit less work expenses perhaps then you've got the 10 times pre retirement income.

So if your income is $100,000 when you retire, then you might need around 1 million.

It's very crude rule that one.

And then another income based rule or asset based rule is having $1 million saved, or any other random number like that.

again it's not based on spend or anything really.

It's just a number that's thrown out that has no meaning for your personal circumstance.

And then finally the best rule of thumb of the lot, not perfect by any stretch of the imagination, but a, good starting point because it's based on your annual spend.

The important thing with the 4% rule of thumb as well is for your annual spend you want to try and use your retirement spend amount.

So think about how your retired life might look and what that spend might be as best you can because it is different to your spend while you work and you want to be able to use your retired spend, because that's the you know that that's what you're going to be living off.

A lot of people use their current spend, which is different and that number is going to be well off.

So to use the 4% rule of thumb, you just anticipate your annual expenses and then multiply that number by 25 and that will give you how much you need to retire.

So if your annual spend is $100,000 a year, for example, then you might need two and a half million dollars to retire, which might sound like a shockingly high amount to a lot of people.

but yeah, one thing to consider as well is it's how much you're going to be spending in retirement after income.

So if you're receiving any income such as New Zealand super or rental income or part time work, you can deduct that from your annual spend.

So if you're planning to spend 100,000 in retirement, but maybe you've got 50,000 income, then you only need to cover 50,000 a year spend which is 1.25 million, saved up for that.

So much, much less to save.

So yeah, definitely need to consider income.

And that's kind of where the 4% rule of thumb, fails a little bit.

It can be hard to use, use that income in the equation.

Basically it's just best to consider your retired lifestyle, how much that will cost and go from there.

multiply that by 25 as a starting point and then from there you can get financial advice and get a more accurate target.

Another good thing to do prior to retirement is to have a mock retirement.

especially if you don't know exactly what your retired lifestyle might look like or how much it might cost, by taking say six months or a year off work, say five years before you actually retire, then you get a really good idea of what you might enjoy in retirement, what you might not enjoy, what you'll stick with and how much it all costs.

And that's great for planning.

gives much more surety around how much you'll need.

And it also means when you retire you're ready to go, you know what you want to be doing outside of work.

with rules of thumbs, as mentioned, they're just rules of thumbs.

You know, they have a lot of flaws.

so don't treat them as gospel and 100% correct.

they are not good enough for you to be honest.

You deserve better.

as I said, all the income rules are rubbish.

Same with the value 1 million for example, rule annual expense rules, such as 4% rule is okay and it's probably the best of the lot.

but yeah, just treat it with a grain of salt.

especially the 4% rule.

It can be a starting point but nothing more.

If, you want to get serious about your retirement planning, then I do recommend individualized advice and also consider the fact that how much you need is a constantly moving target as we age and change.

in my 30s when I first discovered financial independence, I had a much lower number in mind.

but as my life's evolved, I've met a lovely woman, got married, had kids, bought a new house.

We now require a lot more money than when I was a single, late 20s, early 30 year old.

So yeah, how much we needed, we need to retire has changed a lot over the years and chances are it'll do so for you as well.

So don't, don't stick with your any fixed amounts, adjust as your situation changes too.

On this table or grid rather, we have a bunch of numbers and it just shows how many years it might take to retire based on the 4% rule of thumb.

So on the vertical axis you've got annual spends, going up to 140,000 a year.

If you spend more then I can provide that info for you.

Just, just reach out, and on the bottom row you've got your after tax income.

Very important to use after tax because that's the income you've got available, right?

You don't.

A lot of people like to use their pre tax income number because it's higher but you know, it doesn't matter, it gets taxed.

So you want to use your after tax income amount.

so using this graph, for example, if your income after tax is 100,000 and your annual spend is say 65,000, then looking at where those two points intersect, it might take around 21 years to retire and that's starting from zero as well.

So if you've got money saved up already or be less than 21 years, just to give a vague idea of how long it would take starting from the start, zero based on your level of income and spend.

the areas where there's no numbers, it's because the number is you know, higher than, higher than 50 or 60.

And yeah that, that's really too long.

Hopefully, hopefully you can reduce the time down from there.

So yeah, if you need any help using this table, shout out.

it's on my calculators page on, on my website under Financial Independence Calculators.

So if you'd like to use that for your own numbers then, then feel free.

And again we've just got another table here showing how many years working to retirement.

again it's based on income and spend, but it's expressed as savings rate.

So savings rate is basically how much of your income you're saving per year expressed as a percentage.

And someone on a low income can retire sooner than someone on a higher income if they have a higher savings rate.

So it's a critical number, to use.

for example, if someone's on an income of 500,000 and saving 100,000 a year, their savings rate is 20%, because they're saving 100,000 out of 500,000 income, 20% savings rate.

Whereas someone on say 100,000 income rather than 500,000, but they're saving, let's say 25,000 a year, their savings rate is 25% even though they're saving, 25,000 a year and the higher income earn is saving 100,000 because their saving rate is higher, they're going to be able to enjoy retirement sooner than the person with the higher income because, they're spending, spending less in retirement, basically.

So with this table you can see with each increase in savings rate percent there's a reduction in working years until retirement.

So if you're saving 10% of your income, then it might take around 51 years to retire.

Whereas if you're saving 20, percent rather there's a reduction in 14 years.

So 37 years to retire.

So massive, massive changes from smallish increases in savings rate percent.

So yeah, have a look at that table, see how far you're comfortable to push things.

do note that the higher up the savings rate percent you go, the less impact it makes.

So the less difference.

for example, if you're saving 40%, you can retire in perhaps 22 years starting from zero.

Whereas if you increase that savings rate to 45%, you're cutting three years off.

So you can retire in 19 years.

Still good, but nowhere near as big a difference as early on in the savings rate.

And that extra 5% savings may not be worth it for you.

So it's just, just about trade offs and making that decision what savings rate you're comfortable with and not cutting things so fine that you know your life's miserable.

It's not all about cutting spending.

It's finding that level where you're spending, deliberately on the things that you enjoy, but not cutting out the things that you don't enjoy, but not spending so much that you're wasting money and cutting into your retirement as well.

So in calculating your number there's a few considerations.

it's not just as simple as using one of those rules of thumbs.

those rules of thumbs are all ballpark figures as mentioned and just act as a starting point.

So there's a few further things that you need to consider when thinking about your Number, one question might be do you plan to spend all your money or leave an inheritance?

So that's a huge factor in how much you need to save for your retirement.

If you plan to spend everything down to zero, then yeah, you obviously don't need to spend as much as if you're leaving an inheritance.

is there health issues in your family?

you know, might make you higher risk than someone else.

If that's the case, you probably want to have more saved, just to help cover those range of issues.

Are you a risk averse investor?

if you're, you know, a bit afraid of risk, then you probably can't invest as quite aggressively as someone else.

So you're going to need more saved.

someone who is willing to take on more risk doesn't usually need as much saved because their investments are earning, earning more, in retirement.

Are you going to be receiving income from rental property from New Zealand?

Super.

Maybe you're quite sure on receiving an inheritance.

All that factors into the equation of how much you need to retire.

Any extra income obviously means less needed from your own savings for retirement.

Are you going to be retiring early or late?

You know, when are you retiring?

That means how many years do you need to fund in retirement?

Obviously the more you need to more years you need in retirement then the more money you need to save.

And also how will your spending change in retirement?

will the early years be high spending followed by years of less spending?

Will it be pretty consistent throughout?

will it be a lot different to your current work spends?

all those things.

Try and think about the cycle of spending in your retirement and then you can come up with a more accurate number for how much you need as well.

Now we have done an investment presentation on the website before so won't go into too much detail here but yeah, do, do check out that presentation if you want more information on investing.

But for retirement, these are just some of the things that, that you should be considering.

starting with an ideal asset mix.

By that I mean the mix between shares and bonds and cash, maybe rental, rental property and any other assets you might want to hold.

just making sure you've got the right mix there is crucial.

you want, you know, enough growth to be able to have your money working hard for you, but not so much that you're taking on too much risk where you know, money you need in the short to medium term is too volatile.

So you want to get that mix right.

Also you want the mix right between housing and non housing investments.

money tied up in housing is obviously hard, to release.

making sure you've got enough money outside of housing to fund your retirement as well.

investment time frame is crucial.

very, very important consideration.

Almost top, top for me.

where you want your investments to match the time frame of when you need the money you're investing.

So you know, if you need money in the next few years, then you're going to want most of that in cash or cash like products, notice savers, term deposits, things like that.

Whereas periods of say 10 years or longer, you can invest much more aggressively.

yeah, whereas the time frame between say four to nine years, it'll be a mixture of everything.

So yeah, consider your time frame of when you need the money and that will determine your asset mix.

Low fees.

I do harp on about low fees a lot in all my other presentations, but it's so important, it's something you can control, by keeping your investment fees low, that's more money in your pocket.

you know, some people argue that they pay more for their investments because they deliver better returns.

but the stats and the research don't really show that, there's you know, 20% or less of higher fee providers that do better than the lower fee options.

So you know, less than one in five, chance of getting that right over the long term and you can't really know who's who that's going to be ahead of time.

I rather go with the odds, four out of five or more will underperform the low fee options.

And I like to go for the low fees.

those are odds that I like.

And with low fees it's something you control.

Right?

You can't control which fund manager is going to be the best in the future.

You don't know who that's going to be.

Fees, you can control that, you know it's going to be low.

so yes, it's all about keeping that in control and keeping more money in your pockets.

You want to fund your own retirement, you don't want to fund someone else's with high fees.

Another investment consideration is the fact that retirement can be a long time.

I see a lot of clients come to me early in their retirement or just prior to retirement and, and they have all their money in savings, savings accounts or very conservative investments.

And that's is understandable because you know, they're told you you're at retirement, you need your investments to be conservative.

But, as mentioned earlier, retirement can be a long time.

it can be 40 years, for some, if not longer.

And that's a very long time to have all your money conservatively invested.

You're leaving a lot of money on the table by not investing in growth assets.

So you really only want your, money that you're going to be spending early in your retirement to be conservative.

And the rest of your money can be invested a bit more aggressively.

So, you know, don't treat all your retirement money in one bucket, because yes, some will be needed soon, but definitely not the majority.

So yeah, don't treat the majority of money with the minority.

just look at your time frame as a whole and invest your money accordingly.

another thing I see with clients is a commonly used managed funds in retirement, for example, a balanced fund or a conservative fund where it's a mix of bonds and shares.

a big downside I see with that is when it comes time to sell.

So in retirement you do need a drawdown strategy.

It's pretty easy to save for retirement.

You just invest every month.

But when you're in retirement and you're spending money, it does require a lot more thought and a good strategy because with managed funds, a lot of people just sell out of that every year, or whatever the case may be.

Even if shares or bonds are down in value, which means you're cashing in a loss, you're locking in that loss, which is not great.

I like to separate clients money out, so some into shares, some into bonds and some into cash.

So that way when it comes time to needing the money, you can decide whether to sell from shares or whether to sell from bonds or cash.

and that way there's much less chance of locking in Your losses.

So if shares have done poorly, you can grab the money from maybe bonds or cash.

Whereas if bonds have done poorly or shares have done well, you can withdraw a lot more from shares.

And that is what gives you the best chance of your money lasting even longer than it would otherwise in retirement.

Whereas managed funds, you know, you have to sell from the fund both shares and bonds.

You don't get to decide.

so yeah, there's, there's that to consider.

very common.

the other thing as well is have a plan.

as mentioned, retirement is a lot more complicated than, when you're earning and investing, can be complicated.

So yeah, just have a plan.

your money will mass last much longer than it would without one.

And you know, don't, don't be happy with the plan in the future as well.

Your situation changes a lot in retirement.

You might spend more or less than you thought.

every year you might have to sell some assets.

So it's always a good idea to, you know, check in with your numbers every year, to make sure everything's all good.

Maybe your goals have changed as well.

So there's that too.

And if you're not comfortable doing that yourself, an independent financial advisor like myself can, can prove useful just, you know, a few hours, well worth the cost to, to get that right sequence of returns.

Risk that's it's a big risk on people's retirement and it's basically the risk that shortly after you retire, your investments go down in value by quite a lot.

And the reason it's such a big risk is because you've now stopped working, so you don't have your income to be able to buy those cheaper shares.

and it's also the time that your investment balance is the highest it will ever be.

You've saved a lot of money and you're going to start spending it down.

So it's a really high amount and that high amount is going down by a large percentage.

So it's a very real risk that needs to be considered.

and you know, recessions are more common than you might think.

people talk about it all the time like it's you know, rare event.

But it's not that they happen regularly every seven years on average.

That's not to say they might not, they might happen more, more frequently.

For example, they could happen three years apart, in one instance.

so yeah, it's just an average.

But just realize that recessions happen quite frequently and even drawdowns as big as 30% where you lose 30% of the value of your investments.

That happens every 10 years on average.

people think they can predict recessions ahead of time, but they can't.

you know, the, the share market is completely different to the economy and, and that's what makes recessions so hard to predict ahead of time.

And another fact to show how frequent losses are is, is that since 1980 the U.

S stock market has experienced a loss in value at some point every year.

So it's pretty crazy.

In the last 45 years there's been a loss in value every year in the share market and the average of that loss has been minus 13%.

Sure.

In those years a, lot of times returns will recover or become positive.

Even in fact even half of the years the market has pulled back to more than positive, 10% returns.

So just goes to show the volatility of the share market as well.

that's the cost of admission.

You have to accept the ups and downs if you're going to accept the long term returns.

But the alternative is not investing in the share market, which is far worse in my opinion because then if you're in things like savings or bonds, then you're hardly going to meet inflation and your money's not going to work as hard for you.

with sequence of returns risk as well, it really does come down to luck.

The year you were born.

there's nothing more to it.

So some people just get lucky in that regard.

To show the concept of sequence of returns risk further here we've got a very complicated looking graph with hundreds of lines, 125 lines in fact.

And it's just showing the variation in returns based on when you retire.

That's the only change there's yeah, the only change is when you retire.

And look at the difference in outcomes here.

there's 125, 30 year period since 1871.

this graph I've used 30,000 per year spending needs.

That might sound low but remember you've got income and retirement as well.

Hopefully.

New Zealand.

Super.

maybe some work if you're still working.

rental income perhaps, but the variations will be the same regardless of whether you spend 30,000 or not.

I've got a starting investment portfolio of $750,000.

I've used an assumption of 50% shares and 50% bonds, with 0.5% a year fees.

Assume two and a half percent inflation.

And yeah, that graph is what spits out the average result out of all the 125 lines is $830,000 after 30 years.

It's a pretty good average.

the maximum line you can see there is about 3.4 million.

And the worst line there, that light green line you can see going below zero after about 21 years.

So running out of money after 21 years.

And out of all the 125 periods here there's been five failures.

by failures that means running out of money.

So this is used using a website called Fire Calc.

It's F I R E C A L C.

So feel free to jump on that website and have a look at your own specific numbers.

but yeah, on there you'll see a wide range of outcomes.

It all comes down to the year you've retired because it uses historical periods, in this case all 30 year periods since 1871.

Here we've got more examples of sequence of returns.

The first table on the left is using The S&P 500 which is the US 500 shares, shows the returns between 2000 and 2020 and how our investments would look if we withdrew 20,000 a year.

So you can see that after year one our investment has dropped from 400,000 to 343,000.

that's a combination of withdrawing $20,000 but also a drop in returns of 9%.

So we're withdrawing our money in poorly performing markets.

in 2001 we withdrawed another 20,000 but share returns or investment returns have dropped another 12%.

So we've gone from 343,000 to 285,000 and another big drop in 2002 of 22%.

so we're down almost half of our original investment to $206,000 only in 2003.

Starting to see positive returns and a great decade of returns apart from 2008, helps us build back our investments until in 20 years time we're at around $98,000.

The average returns over that time has been around 8%.

So 20 year return we've ended up still money in our pocket.

but because a lot of the worst returns in the share market happened early in the 20 years, we've ended up with less than we might like in the 98,000.

Excuse me, now on the table on the right, we've got the exact same returns, but they've been reversed.

So 2020 returns are now 2000 returns.

So a lot of the best returns are now at the beginning of the 20 year period, you can see that's made a huge difference in how much we end up with in 2020.

the average return is unbelievably still the same, around 8%, but we're left with 912,000 over $800,000 more.

Just the fact that the returns have been, the sequence over the returns has been changed.

It's now the opposite.

So just goes to show, know how unlucky timing can be or, or how lucky timing can be.

And just to consider that early in your retirement, you know, you might not want to give too much to the kids too soon in your retirement, or you don't want to go too overboard with your spending too early in retirement.

Or maybe you just want to invest a little bit more conservatively early in retirement until you've got past that sticky period and, and manage that sequence of return risk a, little bit better.

Here we've got some common sources for drawing income in retirement.

not including New Zealand.

Super.

So you've got work, it's optional for some people in retirement.

Other people it's absolutely needed.

So it doesn't really matter.

It's still a reliable form of income, whatever the case may be.

got rental property, a popular form of income generation in New Zealand annuities.

That's when you give a lump sum of money to a provider, a company that provides an annuity and they give you a certain amount of money every year to spend.

for example, if you give them $500,000, and they give you 5% a year to spend, that might be around $25,000 spending.

in exchange for your $500,000.

got dividend paying shares.

So just like it sounds, shares that pay you a dividend, people often use those types of shares, provide an income.

And then we've got bonds, at maturity, bonds provide a return on our income too much like a term deposit or something similar works too with a bit more volatility.

Of course now there's downsides to chasing income in retirement and I do see a lot of people chasing income.

I don't really like the approach of chasing income in retirement.

I think rental income is fine.

you know, it's reliable generally and you've got the growth of the property itself as well.

same with work income.

It's a good form of income in retirement.

whereas the likes of the bonds or the dividends or the annuities, I don't like chasing that income because I feel like that approach will provide much less in your hands than you would otherwise get from your investments, leaving you obviously worse off.

You do need a lot of money to produce the income that you need.

So if you are relying on share dividends, for example, because dividends return a lot more than the share market in general over the long run, you need more to invest to get that same return.

Likewise for bonds, because bonds are fairly low returns relative to other growth options.

you need a lot more invested to get that income you need.

So you're paying a big price to get that income you need, as well as the lower returns, the returns can vary as well.

So you know, dividend companies can reduce how much they pay in dividends if they've had a bad year.

if interest rates change for the worse, bonds, your bond income will reduce as well.

And it's hard to live a lifestyle on unreliable income, or income that changes up and down a lot.

It just makes it harder to spend your money in a reliable fashion.

you always got that worry.

Also, income focused approach is not as diversified because you're focusing on one part of the investment class like dividends, for example, or bonds.

It's just not as diversified.

It means you've got less money in the total market by narrowing down on one section of the market.

And that carries a lot of risk as well if that section of the market does poorly.

generally income is taxed much less favorably as well for investments that produce an income.

so yeah, that's more money cutting into your pocket too.

And when you're chasing income in retirement, as mentioned, it ignores capital growth.

So it doesn't.

Yeah, you're investing in assets only for income.

And by doing that you're ignoring the other benefits of assets like capital growth.

And it is generally shares, for example, that produce, the highest growth.

They tend to have the lowest dividend payouts as well.

and all that should really matter is the total returns, right?

It doesn't matter whether it comes from income or capital growth.

It's the total returns that matter.

And the total returns tend to be greatest in assets that, that don't pay a lot of income.

So just something to consider.

I know it's incredibly hard for recent retirees to go from work income to no income and to have that total returns approach, by focusing on income producing assets, it gives retirees that comfort.

But just know that for that comfort, there's a big cost and you're giving up a lot of returns and your money won't go as far for you.

For my clients I tend to use the bucket system for deciding how much to allocate and to where and also for help with drawing down your income in retirement too.

there's much more information on my website.

there's blog articles in the retirement section of the blog I believe.

so do check that out if you want more information on the bucket system.

Basically I use four buckets.

the first bucket is for spending money needed in the next three years and all that money is generally allocated to cash like products.

you've got online savings, check accounts, notice savers, term deposits, things like that.

depending on when exactly you need your money.

For example, if you need the money in six months time, you wouldn't do a one year term deposit.

that'll probably be either a 30 day notice saver or just an online savings.

yeah, so there's bucket one.

I do find a lot of people want to try and get really cute with things in terms of, you know, pushing for just a little bit more interest returns.

you know, things like maybe a few bonds or a cash fund which holds bonds, or non banks, things like that.

but the way I think about it is this is money that you, you want to be available when you need it, you want to be sure that it's going to be safe.

so it shouldn't be much risk here at all, if any.

And by being conservative here that gives you the confidence with the rest of your money to invest in shares and bonds.

Whereas if you're taking a little bit of risk in bucket one by investing in non banks or short term money in conservative or cash funds which hold bonds and can be volatile, then that always leaves that thought in the back of your mind or in my experience anyway that you know, maybe you need to be a little bit hesitant investing the rest of your money because you're not sure about your short term money.

So yeah, by being sure with your short term stuff, you can be more confident with your longer term stuff.

So yeah, bucket two is for years four to six.

So spending money you need in the next 44 to six years, I tend to recommend a mix of government, bonds, so not corporate bonds, government bonds and shares with the shares, I don't tend to Recommend More than 30 or 35% here.

So around 70% in bonds and 30% or so in shares.

bucket 3 is money needed in the next 7 to 9 years.

Again a mix of bonds and shares.

This time though, instead of government bonds I tend to Recommend corporate bonds more risky than government bonds.

But the time frame allows that extra risk, seven to nine year time frame rather than four to six years.

In exchange for the higher risk of corporate bonds, you'd expect higher returns over this time frame, with the shares, longer time frame.

So can recommend around 70% shares here rather than 30 or 35% as in bucket two and around 30% corporate bonds and bucket four for years, 10 years plus pretty much all shares, maybe 90% if you'd like.

if you do go 90% shares in the 10% could be corporate bonds or something similar.

But yeah, other than that, around 100% shares.

And then every year you have a look at how much you've got in your different share and bond and cash funds and then how much you need to spend and then you know how much you need to sell down from each bucket can be a little bit tricky doing it the first, first time or two.

but it's a great way of deciding how much to allocate to each assets and yeah, just reviewing your situation every year.

If you do struggle with any of it, then do reach out.

And it can just take literally two to three hours max.

for a financial advisor like myself.

And then maybe once it's done, once or twice, you'll be good to go there on with the bucket one as well.

I mentioned, three to four year period is good to be conservative.

some people think that's a long, long time frame.

But by being conservative here you can delay the decision to sell shares or bonds too.

For example, if it's the end of the year and it's time to sell down some assets from bucket two to bucket one, for example, because bucket one is a three year time frame, you might not have to sell from bucket two right at that moment.

If shares have done poorly or bonds are done poorly, just hold them in bucket two for a little bit longer until you're happier with the state of the share or the bond market and then you can sell there.

And the three year time frames used in each bucket do allow that little bit of give where you can delay that selling decision as well.

So that's useful having those long time frames too.

With retirement I see a lot of people having a lot of their net worth in housing and not so much outside of housing.

And it's not a great scenario to be in to be honest.

it means it can be stressful trying to find money to fund your retirement.

you may be forced into a decision around your housing.

you might have to sell and rent for example.

but yeah, it is a really common situation and a lot of Kiwis get into the situation by, you know, buying that starter house when they're young, and then upgrading house every, every decade and when they can, buying a more expensive house, always having that mortgage to pay and that just leaves little money outside of the house and little time to save for retirement once the mortgage is paid off.

Because you've left such little time for the mortgage to be paid off by constantly upsizing house.

There are options to utilise the equity in housing.

you know, you can downsize to a smaller house, but you may be surprised how little that extra equity may take you.

for example, come retirement, if you're spending 100,000 a year and let's say Downsizing House has created $200,000, you can see that that might only last a year or so, for your retirement.

So the impact of downsizing may not be great.

likewise, Reverse Mortgage can be useful, the extra income, but may not go as far as you'd hope either.

And it's a very expensive product Reverse mortgage too.

there is a new product, provided by Lifetime called the Lifetime Home as well, where you release to them some equity in your house.

So you're giving up some equity and in exchange they give you an annual income.

There's much more information about, Reverse Mortgages and Lifetime Home on my website, both in my blog sections and calculator sections so you can run your own numbers there.

But yeah, just realize, you know, those options are expensive and they may not provide the income that you're hoping for.

So the important thing is just to have a plan for having enough outside of housing.

And if you are using housing, just understanding the different product options and being sure that those options will provide you what you need to be provided with.

Otherwise you need to make the adjustments to your plan as soon as possible.

And the other aspect of it is just being diversified, right?

If you don't have, if you have all your money in housing and not much outside of housing, that's a lot of risk in housing.

if the housing market does poorly, you're not going to do well out of that because you've got nothing outside of housing, Just wanted to discuss compound interests and how it can impact you for the positive and negative at the tail end of your working career.

I see a lot of people strategy involves relying on compound interest to do its thing in the last five or ten years prior to retirement.

But it doesn't always work out that way.

It's not quite as simple as just investing your money and watching it grow.

And a lot of it does come down to timing.

If you get the timing wrong, and that's through no decision of your own, it's just luck, then you can have much less at retirement than you thought you might.

And it's easy to understand why.

It's a common way of thinking because the common advice is to start young with your savings and just invest regularly and you'll retire wealthy with thanks to compound interests.

just doesn't always work out that way I'm afraid.

If you see the advice on a table or graph, it'll be framed in a similar way as you can see below, where in the last 10 years, between years 30 and 40, your wealth doubles.

And yeah, whatever resource you're looking at, it will show you a similar thing.

Straight line increase, every five years, ten years, whatever the case may be, constant increase in savings.

in this example I think I used around 6,000 a year savings or thereabouts, with 6% interest rate or 6% returns assumption.

yes, ending with about a million dollars in this example.

You'll see as well in this example that in the first 20 years you've got just 240,000 or so, whereas by year 40 that amounts increased by more than four times or not, yeah, more than four times to over a million.

So you know, that's ideal and hopefully that's the case for you.

But there are you know, some 10 year periods where the share market doesn't return much at all.

If anything, it's rare for a 10 year share market period to provide negative returns or zero returns.

But it has happened.

15 year periods, not so much.

You can, you can feel fairly, fairly safe that there will be positive returns over all 15 year periods as long as you're investing diversified in a diversified way such as a world share market and, and not being too niche with your investing.

but yeah, failing that, there can be periods of 10 years or less where share market doesn't return anything.

And using that previous example on the table, your 540,000 at year 30, that could still be 540,000 at year 40 if you experience one of those flat decades.

So, yeah, although compound interest is really important.

just be careful.

The message here is not to rely on it too much.

you can hope for it, but, but have a plan for in case returns aren't, aren't as good as you might hope.

and.

And one way of minimizing the impact of a bad decade like that is by saving more than you might think you need to in the early years of your retirement planning.

so that's one option.

otherwise, another option might be having to work a little bit longer.

which isn't ideal, but, yeah, just understand it's a possibility.

And to try and be more conservative with your planning to minimize the impact of a bad decade like that.

Now we spent probably over an hour I'd say, discussing the finances of retirement and we're going to be spending so little time on this slide, relatively speaking, but it's equally as important if not more than the financial side of things.

And that's preparing for the non financial elements of your retirement.

you could have all the money in the world, but if you don't get this right, you might not have the most enjoyable time in retirement.

It's often neglected I feel by a lot of people.

so something that just try and bring to the front of your mind, that you need to address as part of your retirement planning.

Mainly, the fact that work provides more than an income for a lot of people.

It's, you know, obviously the income is the main benefit, but you've also got other qualities that work provides that you might not necessarily think about until you've left.

things like a sense of accomplishment.

you know, work's pretty good at providing a feeling of accomplishment.

it's easy for social interactions.

you know, it's not forced because you're there for a common theme.

You're working.

people are in the same vicinity.

It's easy to interact.

work for many provides social status.

especially those in specialized or what they feel is, are important positions.

they like that feeling of being wanted and valued.

You provides an important feeling of importance or relevance for many people as well.

yep.

And just a way to fill, fill your time basically if nothing else, so your mind doesn't have to wander and you don't have to think of anything else to do which some people, some people value too.

So the important thing with these qualities, to try and think about how you're going to achieve these feelings outside of work if you haven't already, got places for these things.

So you know, outside of work where are you going to find your accomplishment?

who are you going to interact with?

what are you going to be doing, you know, how are you going to be, find that feeling of importance if, if that's you know what's truly valuable for you.

as mentioned earlier, one way of finding this stuff out is a mock retirement.

I think it's a great way of easing into retirement.

maybe a few years before you retire, taking a year off or six months off and trying to find, find these things, if you don't have them already, then you're ready to hit the ground running.

another way might be semi retirement.

So you know, prior to retirement, cutting back your hours and spending more time outside of work on these things.

And just by doing so you hit the ground running.

Once you finally do retire, you're, you're good to go.

you don't have to spend time fluffing about.

Otherwise if you don't think about this stuff or you don't have it ready, you know, retirement, you might go down a bit of a, deep hole in terms of it not, not being what you thought it would be and who knows, feeling depressed and other thoughts like that.

so yeah, very important to get that right.

involve your partner if you've got a partner.

I do see some couples going into retirement with different thoughts as to how it looks, in terms of when, where, how much is spent and all that stuff.

so yeah, you want to be at least on a similar page to your partner.

So you're, you know, the plan works for both rather than just one and as mentioned earlier, part time work or maybe mock retirements can make things that much easier.

So just a few things to think about in terms of the non financials.

don't gloss over this stuff.

It's hugely important to get that right.

So just a final summary of thoughts here.

It's briefly, start off having a plan.

And as mentioned, it's not just your financial affairs, it's also the non financials too.

both equally as important.

So yeah, have a plan for both.

remain flexible with your plan.

So review things annually.

see if anything's changed in terms of your finances or your goals, anything like that and then make the changes as needed.

Make sure you're invested appropriately.

time frame is critical.

So making sure that you're not investing too much in shares, for example for your short term needs, but also making sure you are investing enough in shares and other growth assets for your long term needs.

also making sure you're diversified and having enough money outside of housing to fund your retirement.

very important.

Not just from a liquidity and spending point of view, but also from a risk minimization point of view.

And finally, money, it's there to be enjoyed.

It's not there to hoard away forever.

it's there to be used.

money has utility.

Just yeah, enjoy it.

you only get one life so make sure that you know it's used as efficiently as possible.

So on the things that you most enjoy, anything you don't enjoy, try to minimize, spend on and invest enough in growth assets so that your, your money can grow, more than it would otherwise and then you can enjoy it even more.

So I'll just bring up this final slide, back at the beginning with my contact details if, if anyone needs to get in touch.

There they are.

And just a reminder for anyone that doesn't know, I've got hundreds of blog articles on my website so do check those out if you like.

Ranging from investment planning to retirement advice, financial independence, housing, all sorts and likewise.

There's about 120, 120 odd calculators on my website now.

huge range of calculators for mortgages, retirement, planning, investments planning and all sorts as well.

So yeah, spend some time digging deep into that if you like.

but yeah, reach out if you need anything and thanks again for your time today.