Financial disasters made in the course of a working life can be overcome, as there's often time to make up lost ground, but a retired person's ability to earn his or her way out of trouble is much more limited, and in many cases, non-existent.

But the retired need to think about more than the risk of losing a bundle, say top financial planners Alison Renfrew, Jeff Matthews and Deborah Carlyon. Many are scrimping to get by while sitting on assets which could be turned into income.

Here are some of the worst mistakes the retired make:

• Dipping into the nest egg: The first thing people who retire should do is calculate how much income their nest egg will generate for the rest of their lives, says Renfrew, of Lyfords Asset Management in Wellington, New Zealand. "Dipping into it will drastically slash that income."
  
  She cites the example of a person with a nest egg of $500,000 hoping it will provide income for 25 years. If that person retires at age 65, he or she would have, in reality, an income of around $2,400 per month. A $30,000 overseas trip two years after retirement would cut this retirement income to $27,000 a year.

• Being too generous: Carlyon, from Stuart + Carlyon in Auckland, New Zealand, says retired clients often find it hard to say no to their children, even though they want to. In some cases, a written financial plan has actually given them the proof they feel they need to say no to requests for help.

• Not spending: Some have the opposite problem, says Carlyon. She recalls one client whose relatives joked that moths flew out each time he opened his wallet. Carlyon had to encourage him to spend money on the most basic of necessities, such as getting his windows painted. When he died, his family were amazed. He left a tidy packet, although they thought he was poor as a church mouse.
  
  "This tends to be people in their 80s now," Carlyon says. "They are children of the Depression years. They grew up in houses where jobs were scarce and they didn't know where the next dollar was coming from. It's less of an issue for people in their 60s."

• Holding on to rental property: "Owning investment property is great when we are working," says Renfrew. "The rental income will offset mortgage repayments and the costs of owning the property can be offset against earned income. Once the property no longer has a mortgage and the retired person has a relatively low income, the return on a rental income becomes much less attractive." Why have money invested in property if you are only getting a 3 percent after tax return, she asks? For example, take a rental property worth $500,000. Rental income is $16,800 a year (allow for four weeks' vacancy per year). Rates, insurance and maintenance are $4,000 a year. Rental income after expenses is $12,800 which represents a gross return of 2.6 percent. If this money was invested in a term deposit the gross return would be 8 percent, or $40,000 a year.

• Becoming fearful of risk: Matthews, from Spicers, says the elderly often steer clear of "risky" growth assets such as shares. That means they struggle to keep their portfolio ahead of inflation. That tendency ironically also led them to take even bigger risks and invest in finance company debenture investments, which they thought were safe.

• Taking a reverse mortgage too young: Once you are in your 80s, you can look at having a reverse mortgage, says Renfrew, although she cautions that they can rapidly consume the equity of younger retirees. "These sorts of mortgages have taken a huge pressure from oldies who were previously worrying most of the time about making ends meet," she says. Carlyon cautions against using them for anything but maintenance and medical expenses.

• Leaving a big bequest: Gareth Morgan calls it pressing the "bugger the kids button." It is the decision to not just spend the income from your investments, but to gradually spend the capital as well and leave nothing but memories. This takes some planning, and requires assumptions, such as when you think you will die, but it can result in a much more comfortable retirement.

• Cancelling medical insurance: "I've been paying this insurance for the last 35 years and it's been a waste of time. The premiums are far too high," declared one pensioner to Renfrew just before cancelling her medical insurance policy and, sadly, just before her health started to fail.
  
  "It is vitally important to keep our health insurance in place when we retire," Renfrew says. "You can reduce the cost of health insurance by electing to have cover for major surgical procedures only and also by having a larger excess."

• Living too long: In reality there is no such thing, but outliving your money is a risk we all face.
  
  "Many people think they will die within 10 years of retiring, but end up surprised and broke to find themselves still in excellent health decades after they retired," says Renfrew.

• Correct ownership of assets: Have a look at how your assets are owned. Often it is a good idea to place them in a trust. This means that they will be fairly distributed according to your wishes (as you would be the settler of the family trust).
  
  Having correct asset ownership will help ensure family harmony and reduce the possibility of a family feud after your death. A trust may also enable you to be entitled to free rest home care.

• Stopping making money: "There is a high incidence of this with retired teachers and police officers, roles in which there is a lot of stress followed by sudden idleness," says Renfrew.
  
  "As well as continuing to earn an income, having a transition time is a good idea as you make an adjustment to a whole new way of life." It also means you can leave investments untouched for longer.

• Going it alone: Matthews says those going it alone are more likely to make costly errors driven by fear and greed, such as bailing out of growth investments such as shares when they have suffered a correction, only to miss out on the recovery. Matthews says people often make investment decisions based on less information than they would when buying a new fridge.

Source: Sunday Star - Times; Wellington, New Zealand. Provided by ProQuest Information and Learning. Powered by Yellowbrix.

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