Using income and assets in retirement; Decumulation – the sequel

Judith Davey

Income and Assets in Retirement

On average, the incomes of older people are low and, once they have left the paid workforce, they have few ways to augment them. In a recent survey, the CFFC found that almost half of the people in the 60-64 age group expected that New Zealand Superannuation would be their main source of income in retirement. The majority – 77% – were concerned about living longer than their savings. Thus it is important for retired people to manage their income and assets well. Few have accumulated much over and above the equity in their homes and lump sums on the maturity of superannuation or insurance schemes. KiwiSaver will become increasingly important in this respect. However, many have income from savings in various forms, which can be used to supplement superannuation and to provide a nest egg for large and unexpected expenditures.

As well as credits, there are debits. More people will be entering retirement with outstanding debts. It has become easier to accumulate debt through credit cards, flexible mortgages and student loans, creating a culture where debt becomes a norm. This is important, because repayments reduce the ability to save and make it more difficult to manage on a reduced retirement income.

Options for decumulation
As I mentioned earlier, the mobilisation of assets to improve retirement incomes needs to be considered.

Releasing home equity
Given high levels of mortgage-free home ownership, mobilising capital tied up in houses is an option for many people. There are various ways to do this:

• “Down-size” – move to a cheaper house or a retirement village
• Rent out part of the home or take in paying boarders
• Subdivide the property or use it more intensively
• Sell and move into rented accommodation; the attractiveness of this will depend on how the amount of rent paid compares with the return on (re)-investing capital from the sale of the house
• Sell the home to family or whanau (possible through a loan repaid from the estate)
• Use a commercial equity release product, usually a reverse mortgage in New Zealand (see my June 2014 blog)
• Take out a standard loan secured against a house, but this will incur repayments of interest and/or capital.

Investment options
Outright decumulation means drawing down regularly until capital is exhausted by the expected date of death. But investment for returns in the form of interest and dividends may be a better option. As well as bank term deposits and government bonds, there are also a range of multi- and single sector managed funds and bonds. Investment portfolios may be self-managed or managed by a professional. One possibility is to leave funds in a KiwiSaver account, as recommended by Mary Holm, even after the account has matured. Many KiwiSaver schemes have diversified investment funds and lower fees than other funds. Depending on the provider, money can sometimes be taken out of such funds on a regular basis.

Annuities
Annuities are a way of turning retirement savings, or lump sums from superannuation or life insurance plans, into a regular income. In return for a large deposit, regular payments are made, which can be a fixed amount or variable, and may continue for a set number of years, or until the annuitant dies. The amount payable depends on the remaining life expectancy of the annuitant at the start of the contract (estimated from mortality rates) and the amount of lump sum available.

Annuities remove the need to manage and invest savings, which may be a source of anxiety for some older people. A lifetime annuity reduces the fear that money will run out, but regular payments may be smaller than for a fixed term annuity. These advantages must be set off against the risk that the annuitant may die early in retirement, before substantial benefit has been received, although some annuity plans offer a guaranteed payout period, with continuing payments to the estate.

Despite the advantages, the annuity market is not well developed in New Zealand, although new products are appearing, such as Lifetime Retirement Income (http://www.lifetimeincome.co.nz/). Barriers to the development of an annuities come from both the demand and supply sides. Some are attitudinal – unfamiliarity with the concept and lack of understanding of how annuities work; distrust of financial service providers; the wish to preserve assets for unforeseen events or for bequest. Potential providers have been discouraged by the small size of the local market, uncertainty of future mortality trends and high capital requirements. Further barriers arise from government policies, including tax settings; annuity payments affecting eligibility for means-tested benefits and supplementary assistance; and lack of guarantees regarding the financial security of the annuity provider. In some countries there has been compulsory annuitisation of maturing retirement funds. This could be applied to KiwiSaver.

Inheritance as a retirement lump sum
Finally, as people live longer, inheritances, mainly from sale of the family home, may provide retirement lump sums for “children’ in their sixties.

[1] Commission for Financial Capability – http://www.cffc.org.nz/reviewretirementincomepolicy/may/decumulation-what-we-found

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About Age Concern New Zealand 'on research'

At the heart of everything Age Concern does is a passion to see older people experience well-being, respect, dignity, and to be included and valued. We support, inform and advise older people on issues such as access to health care, transport, housing, financial entitlements, and social opportunities. We also work to combat real problems in our society, like elder abuse and neglect, chronic loneliness and social isolation. We provide specialist services with trained and qualified professionals able to give expert advice and assistance. Age Concern is a charity and relies on the support of volunteers and public donations to do much of the work we do. To help us help older people, please consider making a donation of your time or money. To see how, visit www.ageconcern.org.nz
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