By Janine Starks*
I’m in my late 60s and my wife is 65 in a year. I want to retire from my fulltime job next year, but I’m not sure if I’m making the right decision. We have a number of assets we’d like to pass onto our children and these add up to $780,000 (Our home $250,000; a small house $150,000; cars and caravan $160,000; collectibles $220,000). We can access other money as we have a hobby business, which will clear roughly $200,000 after repaying the bank, plus we have $140,000 in investments, giving us $340,000. I’m currently collecting $800 a month from the Super. My full time job will be replaced by us both working part time and bringing home $900 a month after tax. I have another business that brings in $3000 a month after tax, but it will come to an end in 3 years as the contract runs out. I’m concerned that our Super will be means tested and I’m also worried that we seem to have plenty of assets but not a lot of income.
Lets put this into perspective. You’ve got lashings of assets (it all adds up to $1.12 million and only $250,000 is tied up in your home). You also have lashings of income remaining after you give up work, thanks to your other business interests and part-time jobs.
NZ Super won’t be means tested once your wife turns 65 (even the rich-listers are eligible). You will receive around $1620 a month as a couple (assumes the highest tax-code with other income taxed at 33%). That tots up to $5520 in the hand each month, or $66,000 a year, equivalent to an individual with a gross salary of $85,000. Pretty exceptional for retirees.
The real problem kicks in when $3000 of business income disappears in three years. Your monthly income will fall to $2,500 (assuming you are fit enough to carry on with part-time jobs). Otherwise it’s stripped back to just the Super payments. You have no back up at this point, as you have a stash of assets yielding no passive income (that’s a poncy way of saying that you own a lot of stuff that earns you no money while you sit on your backside).
You’ve told me that your investments, second small house, hobby business, and collectibles earn no income. For the sake of anonymity we won’t talk about what sort of collectibles these are, suffice to say they are garden-gnome-like (ornamental in nature). While they might rise in value, they tend to laze about on a shelf, rather than supply you with holiday funds. You have almost as much invested in gnomes as you do in your own house. It’s quite a remarkable situation.
To me, you sound like an exciting couple – entrepreneurial, with toys like caravans, a cottage and various motor vehicles that make loud noises. You are probably hoarders with all those ‘gnomes’, but you’re also do-ers. It’s far more colourful than ending up with a bunch of term deposits and debating what colour Suzuki Swift to buy in retirement.
Email questions to firstname.lastname@example.org, subject line: Financial Agony Aunt. Anonymity is guaranteed.
I’m going to go out on a limb with this question. Are you worried about the retirement decision being right, or are you actually worrying that you have to face this hotch-potch of assets and sort them out?
The only thing that allows you to retire without stress, will be knowing that a passive income (such as fixed-interest) can kick-in if bad health strikes, or that that you can draw-down lump sums from your investments easily.
Dithering about whether to give up a full-time job, might be your subconscious trying to delay the decisions about your assets. While you are earning, you can ignore the fact that your assets are not.
You can ‘afford’ retirement, as the money exists. The conundrum is simply one of personal preference. What assets will remain for your children and can you bear to sell things you are attached to? Most kids would want you to put your own comfort first.
The gnomes – do they stay or go?
At one extreme, you keep the cars, caravan, cottage and collectibles for your children. The remaining $340,000 could create an income of $12,000 a year or $1000 a month after tax (5.2 percent five-year deposit rates as the indicator, or roughly 3.5 percent net). This isn’t significant and most retirees have to use their capital these days. A draw-down of $20,000 each year (plus annual interest on the remainder) until age 80 is an alternative. Anytime you needed extras you could sell a few gnomes, since there are $220,000 worth.
At the other extreme, you keep the bare minimum of your home, a car, a cheaper caravan, and a few prize gnomes. Sell up the rest. I imagine it might take a few years to liquidate, but if your valuations are correct, you could end up with roughly $800,000. That gives you the opportunity to earn a passive income of $28,000 a year to add to your pension and part-time jobs (3.5 percent net). The capital will depreciate by inflation, but would remain for your children. There is easy access to lump-sums if needed.
The key things you and wife need to discuss are:
- Can you emotionally part with some or all of the collectibles?
- Will your children keep the collectibles (are they their cup of tea) or will they sell? Ask them.
- If your children sell, are they experts in the valuations? If not, will they realise the prices you could have secured? Do they have the time?
- If you keep your assets, how will you split them between your children? Given their worth you’ll need a very detailed schedule in your Will.
- If you sell assets, it will be a full time project that you’ll have to throw all your energy into. Their nature will make it a painstaking process. You need to bear in mind that people often find this very stressful over the age of 70.
- Take advice if you decide to liquidate assets and invest in fixed interest or other areas. Assessing risk is crucial.
Remember these are emotionally charged decisions and the only opinion that really counts is that of your wife and yourself.
*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.