Financial advisers can spend decades working with clients to craft a retirement plan that, on the surface, appears bulletproof from the standpoint of investments, retirement income and asset-liability management only to see it fall apart in short order. The fact is it happens a lot more frequently than many people want to admit.
The reality is that advisers don’t control financial markets, or clients’ savings and spending habits, much less the interpersonal dynamics of individuals’ lives. So all advisers can do is help make clients aware of the numerous pitfalls they face when their life faces the radical transformation to a post-work era.
The common misconception around why many retirees run out of money is that poor investment performance or failed investments substantially dilute the nest egg accumulated at time of retirement. Sure New Zealand has had its share of investment product failures, but the total number of retirees this affects is relatively small and the number who used financial advisers is smaller again.
The cause of the majority of retirement financial failures was eloquently summed by one US financial adviser as being “it’s the things you own or maintain responsibility for that are over 50 pounds that constantly need to be fed”. Cats and dogs of reasonable size are fine. It’s the adult children, relationship breakdowns, lifestyle assets and health issues that are the real cause of retirement financial failure.
The reality is that divorce amongst those over 50-years old has been rising for several decades. Susan Brown and I-Fen Lin in their book The Gray Divorce Revolution stated that roughly 1 in 4 divorces in 2010 occurred among couples over 50. They claim that one divorce tends to breed more divorces. Why? Because the rate of divorce is 2.5 times higher among remarried couples.
As life expectancies increase, the trend is likely to continue. The explanations vary. Children have grown up and are no longer around to mask dysfunctional relationships. Baby boomers in search of meaning tell themselves there has to be more to life than this. Over time, many people simply change and grow apart.
As financial advisers, we work with clients to ensure their investment portfolio is large enough to meet their planned retirement goals. However, when it is split 50/50 and living expenses for each individual increase, then it is no longer the happy contented retirement that either spouse signed up for.
Like so many challenges that surface in retirement, divorce is often symptomatic of two people finding it difficult to make a major lifestyle transition together. “It can be his vision versus her vision,” says Mitch Anthony, author of The New Retirementality.
Both couples and individuals need to find a balance between vocation and vacation, personal renewal and connecting with others
Home ownership costs
The cost of maintaining the large family home, plus in some instances a bach or crib, is often masked when one or both spouses are working. Once the income stops and retirees are dependent on investment income to live, then the cost of maintaining these buildings increases as a percentage of the total available income. It is often many years into retirement before serious thought is given to downsizing the family home, moving to a cheaper location, and selling the bach or crib. In the intervening years, the ownership costs have significantly eroded the asset base.
In previous generations, one reached retirement age, what they had for retirement was fairly meagre, and their children were all employed and financially self-sufficient. Therefore, there was minimal pressure or expectation for the retiree to financially assist their children. Sure, one would spoil those lovely little grandchildren but that expenditure was relatively minor compared to the pressure on some retirees today to assist their children.
Today, people are entering retirement with far larger sums of money than past generations. They are seeing their adult children struggling financially with mortgages, school costs and purchasing the things today that are regarded as being essentials, which in the past were absolute luxuries eg: TVs, stereos, new furniture etc. These retirees feel they need to assist their kids so they offer to pay for holidays, contribute towards large purchases like cars and in many instances, help pay off the house mortgage. These contributions seem to be affordable at the time they are made, but the downstream consequences of no longer having the compounding lump sum to provide the income through out a longer retirement than ever before often leads to the retirees scrimping and scraping later in their retirement. Unfortunately, the charity of the parents is rarely repaid by the kids in the form of repaying the money provided to them in their hour of need further down the track.
When planning for retirement, the assumption is often made that the state medical system or that current health insurance will take care of things. The reality for many is that once they are retired, the costs of maintaining medical insurance is prohibitive and they let it lapse. They find that the state hospital system is satisfactory for those admitted by ambulance or those needing urgent surgery. However, it tends to be less than ideal for those who have medical issues which are not life threatening, and they end up being on a hospital waiting list for many years. If the pain and discomfort is too great, then these retirees resort to going private and incurring massive costs to regain their quality of live.
Spending money and enjoying oneself is what retirement is about. Spending large sums early in retirement is not a major issue if the retirement is short. However, improved living conditions and medical treatment has resulted in the time spent in retirement increasing every decade. This means that a bigger lump sum is required at the start of retirement and if this is whittled down through the above issues early on, then the impact of the lower portfolio balance becomes extreme 10-15 years into retirement.
The myth of home ownership
Throughout our working lives, we regard our home as an asset and proudly believe that as our home increases in value, it is contributing towards our retirement nest egg. This concept assumes that on retirement, we sell our large home and trade down to a smaller one - thereby freeing up several hundred thousand dollars. The reality for many New Zealanders is very different. “Trading down” will only work effectively if you move from a high socio-economic area to a lower socio-economic area. The reality is most Kiwis like to stay in the same socio-economic area as that is where they feel comfortable. A rapidly rising elderly population creates added demand for the type of small house that retirees desire and this increases the price for 1-2 bedroom units - making the benefits of trading down minimal. This is even more evident when you compare the value of the large family home against the cost of buying a 1-2 bedroom unit in a nice retirement village. In many instances, the retirement village unit is more expensive than the house currently being occupied by the retiree.
There is no “one size fits all solution”. The key is to get advice around your retirement expenditure and understand the longer term consequences of not making some hard decisions early in retirement. It is equally important to budget in retirement as it is to budget when accumulating your assets.
Financial advisers can build good investment portfolios to withstand the strains of market cycles but they cannot control the lifestyle issues that inevitably confront retirees. The secret is to plan your retirement, invest into relationships and health and talk often with your financial adviser about freeing up the equity in your home, if the amount in your investment portfolio is starting to decline at a faster rate than budgeted for.