Income options for retirees
It takes a really long time to generate assets and produce an income for your retirement, but sometimes, even when you have saved, the money may not last as long as you want.
So, what are the options to make sure that it does?
It’s a key question for many of us says David Boyle, (right) GM Investor Education at the Commission for Financial Capability.
“[There’s] more of a challenge around maintaining income because New Zealanders are living longer which is a good thing.
“Longevity is increasing but the issue is making sure your income lives as long as you do.
“The first thing people need to think about when they decide to stop work, is where is that income to maintain the lifestyle they’ll want to enjoy in the years after they finish their careers or jobs.”
The foundation of retirement income is NZ Super, which is universal.
Some people have also traditionally put money into private superannuation schemes or bank deposits but sustained low interest rates are putting paid to the notion of being able to live off the interest.
There’s also Kiwisaver, for those working when that was introduced. Others plan to downsize but if you’re buying in the same market, you might not pocket a lot out of that. One in five people aged 65-plus continue in the workforce.
If none of the above provides sufficient funds you may need to look at other options, and it may require a different mindset, David Boyle believes.
“We probably need to think, unlike generations ago, not about passing on wealth to the next generation but also making sure that the wealth that we do have provides us with a very enjoyable time once we finish working.”
Options to unlock funds may include reverse mortgages and annuities.
Heartland Bank’s national manager Lisa Hatfield (below) says its home equity release loans, also known as reverse mortgages, are designed specifically for seniors.
“This is a loan that is simply a standard mortgage but it has no monthly repayments or no repayments until they move out of the home, sell or pass away.
“What it does is it allows the senior to stay in their home while using some of their equity which allows them to free up finances or have access to funds so that they can really enjoy their retirement.”
The loan is based on the age of the applicant.
“The calculation is their age minus 45 and that’s the percentage of funds they can borrow,” says Ms Hatfield.
“Let’s just say a senior is 70, then they can borrow 25 per cent of the home’s value. If he’s 70 and the home is worth $1 million, then 25 per cent of that - they could borrow up to $250,000.
“It doesn’t mean that they have to, that’s just what’s available.”
Most people want a lump sum.
“The product allows for an upfront draw and then you can access funds each year, as you wish,” she says.
“Most seniors do only draw down what they need.”
There’s a 30 day cooling-off period when the loan agreement is signed, and the total can be repaid at any time.
The bank says seniors should evaluate whether the product is right for them, and if there are other options, ie downsizing or other assets that could be accessed.
Ms Hatfield says older people could also chat with their family, if they want to.
“We really encourage the senior to discuss this with their family, we’re happy to talk with them, to discuss it with their family if that’s what they’d prefer. Although we certainly can’t require that, it’s part of our application process that we discuss this with them.”
It provides a way to unlock some of the capital in the house.
Asset rich, cash poor
David Boyle says a lot of New Zealanders could be asset rich but income poor and describes a reverse mortgage as “you can live in your house and also eat a little bit of it to provide you an income”.
“That’s negotiated with the provider to allow you to get a lump sum or an income on a regular basis up to a certain level, and you’re able to live in your home up to the stage that your circumstances change.
“It’s quite complicated – the process is really important.
“It’s important the consumer go through their lawyer. As with any lending document, it’s important they understand the consequences of that decision and the impact on the capital costs of having that money.”
Heartland Bank insists on seniors obtaining independent legal advice about the loans.
“It is really for the senior’s protection,” says Ms Hatfield.
“We want to make sure, even though we have a robust application process and we ask all the right questions, it’s always good to have a neutral third party weigh in and discuss it as well. It’s another way of ensuring that the senior has all the information and understands how they’re proceeding with the loan.”
Once a decision is made to downsize or move into a retirement village, the loan needs to be repaid in full plus the accumulated interest.
There are about 3,500 such loans nation-wide.
It’s not a standard offering by the big banks.
“The big banks – this just isn’t a niche that they’ve been interested in,” says Heartland’s national manager.
“They have their standard mortgage and that’s their demographic of who they want to deliver to.”
Another option is annuities, which have been available in other markets around the world.
“The best way to describe an annuity is that you invest a lump sum. For that, you will be given a virtually guaranteed income from that investment, subject to all the terms and conditions of the arrangement,” says David Boyle.
“Again, quite a complex product.
“It is very important, with any of these types of complicated products, to get some independent advice to make sure that you fully understand how they work but also that it’s appropriate for your own personal circumstances.”
He says there are authorised financial advisers who can help.
“There’s a code of conduct they have to adhere to, and the first point of that is ensuring they’re putting the interests of their customer first before any other interest of their own which I think is a great step.”
Whatever you decide, the CFFC says having a plan after retirement for maintaining your income is as important as accumulating assets during your working life.