Janine Starks slices the numbers on a retirement pot that has swelled to $1.3 million and looks at spending options for two 75-year-olds

By Janine Starks* (email)

From my mail bag:

Dear Janine: We are both 75 and our income from NZ Super is $26,500.  We have term deposits of $1.3 million invested with NZ banks.  The interest we receive averages out around 5.5% a year.  We have an additional $32,000 on call and in bonus bonds.   We live in a 1960s house, drive an older car and love having our own vege garden.  We live pretty modestly. Our expenses each year come to about $42,000.  We did an exercise on sorted.org.nz but are still unsure as to how much we should dip into this capital. Our children are all doing well and don't need assistance at this stage.   Nobody knows how long we'll be around but we want to live it up a bit in the meantime. After all we have worked hard for these savings.   Your thoughts?

I often liken this sort of situation to a doctor giving advice on a plate of cream buns.  There are times in your professional career when the patient is so healthy, your gut reaction is to suggest they get stuck into the buns.  I’m having one of those moments.

You are 75 years old and the clock is ticking.  I can’t emphasise that point enough; it’s ticking loudly.  Not many people live past 90 and those who do, generally have a fairly quiet life.  If you’d like more fun, it needs to start today, because there isn’t a second to spare. 

I’ll get onto the mathematics shortly but it would be interesting to check on your general money-psyche.  Can you think of a treat and do it today?  Let’s say book a table for dinner and make it somewhere a bit swanky. 

Could you pick up the phone right now and do it?  Or was the first reaction that you’re defrosting something from the freezer and it’ll have to wait?  I have a sneaking suspicion the two of you have put a lot of things off for another day. 

Carpe Diam

I think you can afford to live it up more than “a bit”, but that’s going to be a very personal decision.  All I can do is lay out a few facts and let you weigh it up.     

Even if your cash was under the mattress earning no interest you would need to splash NZ$85,000 a year to use it all up by age 90 ($1.3 million divided by 15 years).  Add in your Superannuation and that number is north of $110,000 a year in the hand. 

Using up all the money is an extreme example and probably not an idea you would be comfortable with but it’s a useful marker. 

Conversly, you could keep living your current lifestyle – saving more than you are spending. Your joint income in the hand should be around $85,000.  You are only spending $42,000, which means your capital is growing by $43,000 a year.  And you drive an old car?  Sorry I couldn’t help slipping that in.  I’m having visions of you being related to the Hubbards. 

Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt.  Anonymity is guaranteed.

The scenarios I've just mentioned are the extremes. What you need to do is sit down with your accountant and do some number crunching in order to ponder what’s right for you.  Before you make an appointment, write down the amounts of money you would like to leave to various family, friends or charities and weigh up if your home is appropriate.  If you walk into an accountants office with those things already discussed, they can put their calculator straight to work. 

As an example, I ran the numbers on leaving an inheritance of your home plus $500,000 of capital, with $800,000 of capital spent over the next 15 years.  I have to admit, like you, I struggled with the ‘sorted’ website on this one.  Theoretically it was ok, but it wasn’t very practical.

I resorted to whipping up my own spreadsheet models.  You have three choices on the inheritance: 

If you let the interest compound on $500,000 for the next 15 years there would be just over $900,000 in the pot when you depart (this assumes 4.3% net interest).  Alternatively, you could invest that money in a managed portfolio of bonds and shares, as it belongs to the next generation (hence growth assets). 

The final option is to spend the interest yourself which works out to just over $20,000 a year.  This would mean the inheritance would depreciate by inflation.  In 15 years, it would purchase the equivalent of about $240,000 if inflation compounds at 3% a year. 

Your next step is to look at the maths behind spending $800,000 in capital over the next 15 years:

Option 1:Take equal withdrawals of $70,400 a year for 15 years.  This assumes a net interest rate of 4.3% clocking up on the remaining capital each year.  Inflation must be considered as a sense check.  In eight years time, your annual withdrawal will buy the same as $54,000 today and in 15 years time it equates to $34,000 today.  For retirees who intend to spend less as they age, the inflationary effect may not be a problem as it is a natural method of reducing spending.  

Option 2:Rising withdrawals.  Retirees who are genetically blessed and likely to be bounding around at the same speed at age 90, would need the size of capital withdrawals to rise to maintain purchasing power.  Assuming 3% inflation you would start with $58,000 in year one, rising to $71,000 by year eight and $88,000 by year 15.

Option 3:Declining withdrawals.  Retirees with health worries might prefer to ‘front end load’ their spending to have the most fun in the healthiest years.  In this situation you could start at $95,000 in year one, with 5% reductions.  By year eight you would be taking $66,000 and by year 15, $46,000.  In year 15, $46,000 will buy the same as $22,000 today.     

With each of these examples you would have additional income from your Super of $26,500 and the option of taking $21,500 interest earned from the inheritance each year. 

For option one, this takes your income to $118,000 a year in the hand.  You need an urgent trip to the accountant to run different scenarios which might suit you and get a grasp of how sensitive the results are to interest rates, inflation and the amount of capital you’d like to spend. 

In the meanwhile, crack out a bottle of bubbly, the good stuff.

*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.