7 minute read
How much do you need to retire?
Jules Riley*
Three big questions stand between you and the answer to how much you need in retirement.
How long will you live? What kind of lifestyle do you want? How much are you prepared to save to get there?
How long will you live?
If you’re like most people, thinking about your own mortality is too uncomfortable to dwell on for long. But your lifespan is one of the biggest unknowns when it comes to ensuring you’ll have enough to last as long as you do.
According to the New Zealand Society of Actuaries, a 65-year-old woman is expected to have a median lifespan of about 90 years with one in five living until at least 95 years. Men are expected to live about 2 to 3 years less, with a median lifespan of around 87 years and one in five living until at least 93 years.
So, if you retire at 65, you might have 30 years in retirement. That’s almost one-third of your life.
What kind of lifestyle do you want?
Funding 30 years of retirement spending requires a decent-sized nest egg. Thankfully, NZ Super does some of the heavy lifting. It provides an after-tax income of about $26,000 each year for a single person or around $40,000 for a couple. It’s also indexed to the average wage, which means that most of the time it grows faster than inflation (as measured by CPI).
While NZ Super provides a good base of inflationprotected income, for many it won’t be enough. Massey University reckons that a couple living in Auckland and Wellington regional council areas or Christchurch City need an additional $11,000 each year on top of NZ Super for a basic ‘no frills’ retirement, or an additional $47,000 per year for a comfortable retirement with ‘choices’.
To fund these lifestyles, the Massey research suggests a couple living in the above regions would need to save a nest egg of around $235,000 for a basic retirement or $969,000 for a more comfortable retirement.
If you’re on track to hitting these numbers, well done. If not, then how can you get there?
KiwiSaver can help but may not be enough
What you save in your KiwiSaver or superannuation account will probably help you some of the way to achieving your retirement goal. But contributing the standard 3% of your salary likely won’t be enough if you want a better than basic retirement.
To illustrate, imagine we have a 35-year-old couple earning $120,000 each. They’ve both just made first home withdrawals, so they have very little in their KiwiSaver accounts. Contributing 3% of their salaries into growth funds for the next 30 years is expected to give them around $662,000* by age 65, after adjusting for inflation. So, even though this household earns $240,000 each year, which is more than double the average household income in New Zealand, they will be around $307,000 short of the amount needed to fund a comfortable retirement.
The obvious solution to bridge this gap is simply to suggest that this couple increases their KiwiSaver contribution rates from 3% to 6%, which would enable them to achieve their goal. However, saving beyond a certain rate into a KiwiSaver scheme isn’t necessarily optimal. This is because you typically can’t access your money until the age of eligibility for NZ Super (unless you make a first home withdrawal). Also, the main benefits being Government contributions and matching employer contributions, can get maxed out at relatively low personal contribution rates, for example 3% for most Kiwis. So, saving more, but doing so outside of KiwiSaver, can help you both to achieve your retirement savings goal and retain access to your money.
Other ways to invest for retirement
One such way to do this is by saving additional sums in an unlocked managed fund, like MAS Investment Funds. Our couple could save an additional $581 per month in a growth fund and together with their KiwiSaver savings, could expect to meet their goal of around $969,000 by age 65.
There are two major advantages of this approach when compared to a retirement plan based on investing in residential property. The first is that managed funds are typically very liquid, meaning you can withdraw some or all of your savings relatively quickly. Having easy access to your savings is a hedge against life’s ability to occasionally deliver painful surprises that you can’t prepare for like illness, injury and redundancy. Liquidity also enables you to easily switch funds to ensure your investments remain aligned to your risk tolerance, which may change over time as you approach retirement. For example, our hypothetical couple might wish to invest in a growth fund until age 55, a balanced fund from age 55 to 60, a moderate fund from 60 to 65, and be in a conservative fund in retirement.
The second major advantage is that by saving additional contributions into a managed fund, you can easily access a wide range of investments. For example, many of the MAS Investment Funds have exposure to over 1,000 different companies in more than 40 countries. This level of diversification is valuable and can help to de-risk your personal financial situation. If the bulk of your wealth is invested in rental properties and/ or your family home, you are vulnerable to specific risks. This means that one particular threat, such as a natural disaster or domestic interest rate hike, can have an outsized impact on your net worth. Luckily, specific risks like these can be mitigated by diversifying your savings into other assets, like shares and bonds, including those listed in other countries.
Is time on your side?
The amount of money you have in retirement ultimately depends on how much you save now and how long you save for. The earlier you save, the more your money will benefit from compound returns and the less you’ll need to put aside each pay cheque. The opposite is true if you start saving later in life. But, if time is no longer on your side, there are a few other ways to bridge the gap between the lifestyle you want and what’s on offer from NZ Super. These include unlocking equity by downsizing your home, changing your living arrangements, ensuring you’re in the right investment fund, and working beyond retirement age.
Whatever your financial situation, MAS is here to help. Our Members have access to our nationwide network of expert MAS Advisers at no additional cost. We can sit down with you and help you understand the standard of living you require in retirement, what you’re on track to achieve, and if necessary, how to bridge the gap between your current path and the lifestyle you desire. Get yourself on track today by contacting us at info@mas.co.nz or on 0800 800 627.
Jules RileyHead of Growth (Investments), MAS
*As projected by the MAS KiwiSaver Retirement Calculator, assuming that a balance of $1,000 is left in the member’s KiwiSaver account after their first home withdrawal.
Medical Funds Management Limited is the issuer of the MAS KiwiSaver Scheme, the MAS Retirement Savings Scheme and the MAS Investment Funds. A PDS for each Scheme is available at mas.co.nz
This article is of a general nature only and is not intended to constitute financial or legal advice. MAS only provides advice on products offered by its subsidiary companies. Advice is provided by MAS or its nominated representatives, who are all MAS employees. Our financial advice disclosure statement is available by visiting mas.co.nz or calling 0800 800 627. © Medical Assurance Society New Zealand Limited 2024.
