Investment versus lifestyle in retirement

I suspect that most people only seek financial advice when two specific ‘triggers’ are met; they realise that they are facing questions that they cannot easily answer, and they have met a point in their financial affairs where seeking specialist knowledge seems wise. Often this occurs when regular savings have reached a specific point, mortgage debt has been significantly reduced or perhaps an asset has been sold or matured.

However, over recent months I have been approached by an increasing number of clients where the trigger for advice has been where families have been helping their aged parents deal with the issues involved in moving into a retirement village or rest home care. What is interesting about this advice is that it highlights the difference, and interplay between, investment versus lifestyle decisions.

As financial advisers we are very good at calculating such things as; internal rates of return and the risks that might be involved in any given investment. These decisions, driven by investment analysis, are our ‘bread and butter’. However, running in parallel with these investment decisions there may be near term lifestyle issues which are sometimes overlooked or treated as second level decisions.

What is interesting, is that when advising retirees who are contemplating the next phase of their retirement, often investment decisions come second to lifestyle decisions.

For example, with most retirement villages your interest in the property is secured by a ‘Licence to Occupy’. Under this arrangement you purchase the right to occupy the property and then sell it back to the provider when you leave. In most cases this arrangement requires that you sell the licence back to village owner at around 70 to 80% of the purchase price. In other words, you lose 20 to 30% of your capital when you ‘depart’. From a financial perspective such a deal would have many financial analysts (and some family members) screaming NO. However, this significant financial cost must be weighed against the lifestyle advantages. 

What can’t be underestimated, and is difficult to quantify, is the quality of life benefits offered by these villages.

What value would you (and your family) place on benefits such as; being part of a community where the chance of social isolation is reduced, having the comfort that should one of a couple pass away their surviving partner will be taken care of or when (not if) the need for more advanced care, that routinely accompanies old age, can be provided with more modest location change.

It is fair to say that my views on these matters have changed. In the past I have had problems with the guaranteed capital loss (a phrase that will catch in the throat of any financial adviser!). Recent experience has taught me that although we tend to pride ourselves on our self-reliance, with advancing age this independence can have a social ‘cost’. Worries about home maintenance and the risk of social isolation are just two examples where the benefits offered by a retirement village environment help off-set some of the financial cost.

However, you only get the luxury of placing lifestyle decisions ahead of financial in retirement if you have made sound financial decisions at earlier points in your life.

You sometimes see a degree of reluctance from some family members at the prospect of an inheritance being reduced by the retirement village model. Over time there may be new ownership models that evolve but for now the Licence to Occupy model is the most common.

There are of course legal matters to consider so your lawyer should be involved in the discussion. Where a financial adviser will be able to help will be with conceptional discussions, working out the sustainability of meeting the villages ongoing costs and managing a portfolio to meet those costs.

For me this area is a salient reminder that having money does not guarantee happiness – but it can provide choice. And that when you are 85 something as simple as whether you have the choice of having your own ensuite can bring great happiness.

What value would you (and your family) place on benefits such as; being part of a community where the chance of social isolation is reduced, having the comfort that should one of a couple pass away their surviving partner will be taken care of or when (not if) the need for more advanced care, that routinely accompanies old age, can be provided with more modest location change.

Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.

First published in the Otago Daily Times on 12 February 2018.