Agony Aunt: Bonus windfall gives reason to retire now

Dear Janine,

We are a recently retired couple, though I have chosen to work on a salary of $40,000 for another year until I'm 66.

My wife will receive national super in March also.

We have a freehold home and $200,000 in Bonus Bonds which last month won us another $100,000, so $300,000 in total now.

We have $50,000 in the bank and wonder constantly if we have enough for our retirement or should I continue to work, which I don't really wish to.

Look forward to your response on if we should invest the bonus bonds now into a rental property/shares or be happy with what we have?

ANSWER:

Someone upstairs is sprinkling good-luck dust down on you.

What an incredible win! Overnight, you've increased your savings by 50 per cent, tax free.

There are 2.6 billion bonus bond units on issue and only five numbers each month win a $100,000 prize. It's akin to waking up on a bed of four-leafed clover and for that reason you need to grab retirement by the horns.

Surely it's a sign from above. Money can't buy "time".

Listen to your gut reaction - you don't really want to work.

Combine that with the luck of the Irish and the signals seem strong to me.

There are huge risks in not retiring - health, happiness, hobbies, freedom and family are just as valid as fortunes. Be very proud of your $350,000.

It's a fantastic amount of money to accumulate and you can make it work.

A retired couple will get super of roughly $25,000 a year in the hand, whereas you've been earning $32,000 after tax.

It's not an enormous gap to bridge.

To put your mind at rest and use a very basic example: I obtained a fixed five-year deposit rate for some of our own money recently, for medium-term consistency.

The bank manager at ASB kindly increased their rate at little (always ask for a bit more) and agreed to pay quarterly interest.

If we just assume the advertised rate of 6.75 per cent fixed for five years on $350,000, interest will come to over $18,000 (after 21 per cent tax, the new RWT rate from 1 April). Adding in Super gives $43,000 in the hand.

It's more than you are earning now. My example is far too simple and doesn't allow for inflation, an emergency cash fund, diversifying investments, using bonds, or the possibility of increasing your income by eating into your lump-sum as you age.

Most Kiwis with this size lump-sum will have a plan that combines interest with a capital reduction to create an even greater income.

You need to decide if you are a fan of "skiing" (spending kids' inheritance).

They will presumably get the house, but you can even gobble the bricks with reverse equity loans, or downsize.

There are dozens of ways of skinning the cat and a financial planner will help you work through it. The website sorted.co.nz is wonderful.

Go to the "Managing Your Nest Egg" calculator as it shows your income if you wish to maintain or deplete your lump-sum.

It's a bit addictive - I played around using your lump-sum for ages. By the way, I'm no fan of rental property in this type of situation as I think the yield after expenses could be disappointing and the outlook flat. But it's one to discuss with an adviser.

Don't do this at home . . .

After reading your story, I'm now terrified the rest of the country will sell their portfolios and rush off to ANZ for a fistful of lucky-dip bonus bonds. We really need to put this win in perspective.

Bonus bonds make investment managers wince (well me, at least).

Investors kindly donate their interest into a central pot, and a lucky few get the winnings.

The vast majority of people are lining someone else's pockets. Five or 10 years down the track you could have won nothing and kissed goodbye to a lot of cash for the spin of a wheel.

On $200,000 it tots up to about $50,000 in lost interest over five years and $110,000 over 10 years (using five-year deposit rates of 6.75 per cent/33 per cent tax).

There are people who have held bonds for 30 years and not won a bean.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They 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.