There is no right or wrong way to spend your money as you get older – after all, you’re the one who earned it. For some, older age is an opportunity to cash in their chips and do everything they’ve ever wanted, using all the money they’ve saved in the process. Others, for example, see money as something that transfers across generations, and they will want to leave a little (or a lot) for their whānau to use in the future.
Whichever path you choose is entirely your decision (although it is recommended you speak to a trusted financial adviser before setting any plans in place). While you may wish to talk with trusted family or friends about your plans too, their ideas and thinking shouldn’t influence your intentions.
The idea of leaving an inheritance, for example, has changed over the years; while it was once an expectation, it has now become an unnecessary but welcome surprise. This shift is down to many factors; people living longer (and therefore needing more money in older age), the changing dynamic of the traditional nuclear family, and the comparative increase in incomes among many younger generations.
My wife and I, for example, are in the situation where we now make more money than our parents. We sat down with them recently to let them know that we aren’t expecting any money to be left to us; we would rather see them use it while they can – and especially if/when their needs change as they get older. They may still choose to leave us an inheritance – of which we would be very grateful – but it will be because they want to and not because they feel obligated to.
If you do wish to leave an inheritance, it’s important to ensure you do so while still financially looking after yourself in the process. The New Zealand Society of Actuaries suggests that one of the best ways to ensure you have money leftover at the end of life is to use the ‘Inflated 4% Rule.’
What this means is that you would take out 4% of the starting value of your savings pot (adjusted for inflation each year). You would receive the same ‘real’ amount of money each year (as it is inflation adjusted) – if you had $100,000 in savings this would be equivalent to $4000 a year, for example (or about $154 dollars a fortnight). This would top up your fortnightly NZ Super payment (see rates here).
As you are drawing down the same amount of money each year, you can stretch out your savings for a long time, thereby providing the option of leaving behind a significant inheritance (relative to the size of your retirement savings). The downside, however, is that this option provides a lower income stream than some other options (which you can find on the New Zealand Society of Actuaries Rule of Thumb introduction document).
The question of whether to leave an inheritance is completely up to you and if it’s something you’re thinking about, putting financial plans in place to meet that goal is key.
Disclaimer: This article is not intended to replace professional financial advice. It is recommended you seek your own independent financial advice from a trusted professional.