7 common retirement myths debunked
When you are working hard to bring up a family it's hard to imagine being retired. Retirement is like another world with a completely different set of issues, opportunities and constraints.
On the plus side (if you are lucky), you will have no mortgage, no dependent children and plenty of spare time.
On the other hand, you will have a low income, the risk of health issues and eventually the end of life.
Because it's so different to working life, it's easy to make assumptions about how it will be, and often those assumptions are off the mark. Let's look at some of the most common myths around retirement.
If I join KiwiSaver I'll be saving enough for my retirement.
Everybody's expectations for retirement are different. Whether your KiwiSaver fund will be enough will depend on the kind of retirement you envisage.
If you hope to see the world you will need significantly more than someone who is content to stay at home and spend time with friends and family. It's best to set some clear goals for your retirement and then work out how much you will need.
As I get older I will need less income because I won't be so active.
Retirement has different stages.
Early retirement is a great time to be active; to travel, play sport and take up hobbies. These things all cost money.
As you become less active, your needs will change, but may require the same or even more money.
You may need to pay for healthcare, replacement of your car or redecoration of your house.
Towards the end of life, you may need to pay someone to do your housework, mow your lawns or cook your meals.
Alternatively, you may need funds to move to a retirement village or rest home.
I won't need health insurance because New Zealand has a great public health system.
For people over 50, hip and knee replacements, colonoscopies, cataract extractions and skin lesion removals are the basis for the bulk of claims paid by health insurers.
While these can all be done within the public health system, there are long waiting lists. Without insurance, your choices are to pay for private healthcare yourself or wait for treatment.
When I retire I will move to a cheaper house to free up money for my retirement.
While many people move to a smaller house when they retire, they tend to buy a newer house requiring less maintenance, paying the same or even more than the value of the house that was sold.
When it comes to the crunch, most people feel uncomfortable moving to a house of a lesser standard or value than what they have become used to.
I will aim to live off the income I earn from my investments and leave the capital untouched.
This aim is both unrealistic and undesirable.
To produce additional income of around $10,000 after tax per annum and keep ahead of inflation, you would need retirement capital of $500,000 assuming a rate of return of 2 per cent after inflation and tax.
If you are prepared to run your capital down over 25 years, you will need retirement capital of just under $200,000.
By not using your capital you are depriving yourself of income for the sake of your beneficiaries, who, let's face it, are probably going to spend it.
It is hard to see the value of your retirement nest egg slowly disappear when you have spent a lifetime building it up, but the purpose of it is to make your life comfortable in your final years.
I'll invest in a rental property to provide an income when I retire.
Investing in property can be a great way to build wealth while you are working, but it's not such a great way to provide for your retirement.
You can't easily access your capital, which means your income is less than it could otherwise be, you have all the hassles of being a landlord, and from time to time you may have large bills for repairs and maintenance which will be a struggle to pay.
I should invest all my money conservatively in retirement because I can't afford to lose it
Your retirement will hopefully be a long one and there is nothing worse than running out of money before your life ends.
The most conservative choice you can make is to plan to live for up to 30 years in retirement.
Thirty years is a long time to have money invested in conservative investments with a low return.
Given that you won't be spending all your money at once, put a chunk of it into a long term portfolio with exposure to growth assets such as shares.
Otherwise, inflation and tax will erode the purchasing power of your money.
Written by Liz Koh. First appeared on Stuff.co.nz.
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