4. The middle ages
Ah, it’s nice to finally take a breather. How does it feel to see the children finishing high school or graduating from university, leaving home for an overseas experience, flatting with friends…or getting married? And did you ever think the day would come when you had paid off the mortgage – it’s finally here! Say it, “discretionary income”...it has a nice ring to it! You’ve set some goals for your retirement and you’re doing OK.
Born after World War II and known as the ‘baby boomers’, your age group is changing the face of New Zealand society as it moves through life’s passages.
Your generation grew up on rock and roll, flexed its political muscles over Vietnam, and enjoyed the job opportunities and prosperity of the 1970s and 1980s.
Now your children are probably in their teens or early adulthood, completing their education and beginning to move out of home.
This passage in life is recognised as the period for maximum saving because household income is at its peak and, more particularly, because the major commitments of earlier years – mortgage, education, home improvements etc – are now less in relation to current household income.
Possibly for the first time, the household has some true discretionary income for that well-earned overseas trip or some of life’s other pleasures.
At the same time, this is the financial passage when you are most likely to receive a bequest or inheritance from a deceased estate.
This is also the time when most mortgages are paid off and, even if not repaid in full, they now represent only a small proportion of annual family income. Repayments are generally lessening the principal (not paying interest) and the debt reduces quickly.
On the other hand, there may be new obligations. Today, more and more households are facing the prospect of caring for elderly parents.
This is the financial passage in which second income earners may decide to reduce their work commitment or permanently leave the workforce. Within this period, on average three out of four second income earners are likely to leave the workforce. In future, this departure will only be possible if retirement financing plans are made and achieved.
So, it is obvious that a defined and clear retirement plan must be enacted in this financial passage.
From age 50 to retirement at age 65, the primary income earner can still reasonably expect to double their salary. Given that the lump sum total retirement pot you will need is about 7.5 times your final annual income at retirement, it is easy to see what needs to be done.
If you expect to retire before age 65, you will need more than 7.5 times your annual income in order to finance the extra years of retirement.
You should also review your life insurance needs. While the mortgage may be reducing and the children are no longer dependent, it’s possible there would be no second income to assist the surviving partner in the event of the main income earner dying.
You will need to do your sums again to ensure that any dependants will have sufficient capital, over and above superannuation and savings put aside so far, to draw sufficient incomes.
As in all other passages, it’s necessary to have an up-to-date will.
An examination of your lifestyle is also important in this passage. Psychologists are emphasising the need for both partners to use this time to develop new life skills in preparation for the years of retirement.
Until now, work has often provided the primary focus of identity and support for the main income earner, and the thought of that being removed at retirement often upsets retirees.
We recommend that this passage be seen as the time to develop new interests. In effect, you need to prepare for a new career called ‘retirement’.
Perhaps enrol in a course or programme that interests you. Thousands of New Zealanders are already doing it, learning new things and enjoying the challenge.
You may want to check your position against the broad averages that apply to New Zealand men and women aged 45-60:
Complete your personal checklist now to enable you and your partner to determine how you are progressing and what changes and improvements you need to make, particularly if you want to retire before age 65.
Summary
These are the critical years in the financial passages of life: for ensuring that interests are developed outside of work, and ensuring that adequate resources are available for security in retirement.
The objective is to have a savings pool of about 7.5 times your annual income at age 65. If you want to retire younger than that, the savings pool will need to be even larger.
If your score was less than 75, it is very important you act now to put your affairs in order, as there aren’t many income earning years left in which to set aside enough to finance you once you leave the workforce. If you’re not sure how to do this, seek advice from a professional financial planner.
Now go to Back to basics for more information about keeping your finances under control.