Many of us focus on building up a sizeable investment nest egg – which is a good prudent thing to do. However, once retired, we fail to work with a financial adviser and establish how much of that nest egg we are likely to consume prior to our death. We end up keeping all the money invested just in case it is needed for a rainy day.
I recently attended the funeral of an uncle of a good friend of mine. The uncle had never married, he had built up a sizeable business and sold that on retiring. He then filled his retirement days building a substantial direct share portfolio and managing this himself. This portfolio plunged in value in the GFC so, at the bottom of the cycle, he sold all the shares and moved to cash. Over the intervening years, he travelled regularly but spent frugally. I met him intermittently over those years and his constant remark to me was how bad things were with low bank interest rates (he never re-entered the sharemarket so missed out on the five plus years of very good returns since the GFC). His brothers and sisters, plus nieces and nephews, all knew he had lots of money but they never got more than a $20 present of cash at Christmas time.
Just after he moved all his money to cash, he had a mild stroke which curtailed travel and driving. He sold his home and moved to a retirement village where he did very little and spent even less. The portfolio generated approximately $100,000 in cash per annum and after using his pension, he only needed an additional $10,000-$20,000 pa to live on.
He died aged 88 years and the sale of his retirement village apartment, plus the cash he had accumulated, amounted to $2.3m. The last 20 years had been spent conserving his nest egg in case he needed it. The money did not appear to make him happy and it certainly did not benefit any of the other family members.
My friend asked me to be involved in the probate and disbursement of his uncle’s estate as his mother was 86 and suffering from mild dementia and his other uncle was 92 and not in any better shape.
Discovering that the deceased had $2.3 m of assets of which about $2m had sat in cash for over five years caused a degree of frustration within the wider family. They accepted that he could do what he liked with the money as it was his and they had no right to ask him for any, but it still rankled them as all had struggled along the way.
This got me thinking about how the deceased could have better used his money. A possible scenario could have been:
- Obtain financial advice, identify a likely age of death and work out how much money was required each year to do all the things he wanted to do plus a bit more in case he lived longer.
- Not have all the money sitting in term deposits. Instead, a good portion of it could have been in more growth-oriented investments as it was evident he was never going to need all that money and it would only have been passed onto his brother and sister upon his death.
- Talk with his brother and sister once he had his stroke and identify how he could assist those who were going to inherit the money anyway in the future - the idea being to assist them now rather than upon his death.
- Offer to use some of his surplus cash flow to pay some or all of the medical insurance premiums for his sister. She was unable to afford these premiums so had cancelled her private medical insurance about three years ago, was now in immense pain with a hip issue, and was on the public hospital waiting list for a future hip replacement operation. All he had to have done was probably pay $1,000-3,000 per annum towards her medical insurance premiums.
- Lend $50,000 to his niece so she had enough to purchase a home. This could have been provided as a properly documented loan rather than as a gift. If necessary, he could even have charged an interest rate equivalent to the term deposit rate – that way he would still have had income coming in.
- Fund the cost of an MBA for his nephew (my friend) so he could upskill and by doing so, obtain a higher paid job. My friend had approached his uncle two years previously asking if he could borrow money from him for this purpose and had offered to pay interest on the loan. His uncle had turned him down – crying poverty due to reduced bank interest rates.
This case is not about the wealthy being obliged to assist those who are worse off financially. That was never the expectation of my friend and his family. What this case does show is that if the deceased had taken professional advice, he could have identified whether he had enough to live on and then have been able to make different choices along the way as to how to spend some of the money. It is about seeing how you can assist your loved ones around you so they can benefit from your money while you are still alive, rather than receiving a lump sum upon your death. Often, it is not about giving someone a big lump sum - it is more about paying someone’s insurance premiums, contributing a few hundred dollars each year to the grandchildren’s KiwiSaver accounts, or acting as a guarantor (having put appropriate security in place) so a family member can get onto the housing ladder.
The team at Milestone have a number of different software tools to help investors identify how much they need in retirement, whether their lump sum will last and what the implications would be if they lent some money to family members.