Malcolm Menzies: Everyone's nest egg will be different

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The Commission for Financial Literacy and Retirement Income responds to a call by the Financial Services Council for Kiwis to save $350,000 for their retirement.
Malcolm Menzies, group manager of research, Commission for Financial Literacy and Retirement Income
Malcolm Menzies, group manager of research, Commission for Financial Literacy and Retirement Income

There is no one-size-fits-all approach to how much you should save for retirement.

The Financial Services Council has told New Zealanders they need upward of $350,000 for retirement, but we don't believe that's a magic number.

Not everyone needs a nest egg that big.

If you don't think you can save this much by the time you retire, keep calm and read on.

Many New Zealanders will be able to get by on much less.

In fact, 60 per cent of over 65-year olds rely entirely or almost entirely on New Zealand Superannuation alone.

Because we have relatively low rates of old-age poverty in New Zealand we know that NZ Super is doing a pretty good job.

However, NZ Super provides only a very basic income.

It doesn't buy a fancy lifestyle or allow for luxury trips around the world.

If you have no savings and are still paying a mortgage or rent when you retire, you may struggle on NZ Super.

A growing number of people these days seem to have higher expectations of retirement than earlier generations.

They want more than NZ Super can provide and will need to save to fill the gap.

So how big is that gap?

It's different for every person, but generally people should aim to maintain a similar quality of life in retirement as they have enjoyed while working.

You don't want your income to "crash" when you stop work.

On the other hand, most people (and their families) don't want to be like paupers while they squirrel away piles of dosh, then live like kings or queens in retirement - assuming you make it that far.

It is possible to over-save.

Some very low-paid people and beneficiaries actually get an increase in weekly income when they go onto NZ Super.

For them, the gap is zero.

Others find ways to economise, and the gap is small.

Quality of life in retirement is not necessarily all about income.

But for many baby boomers and beyond, the gap will be large and it is vital to plan for having a good income in retirement.

As Financial Services Council chief executive Peter Neilson said in his column, a useful rule of thumb might be that you need to save enough to get double what NZ Super can provide (currently that's $564.52 net per week for a couple, $366.94 per week for a single person living alone).

Another way to estimate how much you will need is to work out your actual costs of living in retirement.

There have been a number of surveys to gauge perceptions of what people think is required, and these often come up with figures similar to the ones quoted by the FSC.

If these seem a bit daunting, you could instead try a simple budgeting exercise to determine what you will and won't need in retirement, and how much that will cost.

Add in NZ Super and figure out how much you'll need to save to generate the balance.

There are calculators to help you on Sorted and it's also worth paying for some advice from an Authorised Financial Adviser.

To help you find an Adviser search the Financial Markets Authority website or Mary Holm's website.

In our 2013 Review of Retirement Income Policies, we brought together three pieces of research aimed at working out how much people would need to save for a healthy, 25-year retirement that also allowed a few "frills" on top of what NZ Super could buy.

The answer was extremely rough and ranged from almost nothing to $205,000 per person in today's dollars - a figure $145,000 less than Neilson's own.

To explain the difference, let's look at some assumptions.

Neilson pointed out that our 25-year retirement was based on mid-range projections for longevity, and that's true.

There's a risk that people will live longer and outlive their savings - suggesting a need to save more.

But NZ Super covers off much of this "longevity risk" because it's paid until you die.

You can get an estimate of your own life expectancy by searching for "how long will I live" on Statistics New Zealand's website.

NZ Super is also indexed to the higher of inflation or wages, so keeps up both purchasing power and relativity with the rest of the population.

Income from extra savings should certainly keep up with inflation, so that you can still use it buy the same amount of goods and services, but it is arguable whether they need to keep pace with wages.

That's a decision you need to make.

Neilson also factored in an increase in the age of eligibility for NZ Super to 67 and suggested that KiwiSaver balances be used to fund the years between 65 and 67.

It's just as likely that a majority of people would continue working until 67 and not need to tap into their KiwiSaver any earlier than that.

The percentage of New Zealanders aged 65+ who are employed is very high by international standards.

The real problem with raising the age occurs for people who due to ill health or infirmity cannot work the extra two years and retirement income policies will have to take their needs into account.

There is no one savings target that will suit everyone.

Each person needs to decide what they will trade off today for the sake of tomorrow, and to set long term financial goals.

Everyone needs to think about the lifestyle they aspire to and to seek good advice.

These moves will help them reach their retirement in good financial health.

Dr Malcolm Menzies is the group manager of research for the Commission for Financial Literacy and Retirement Income.

- NZ Herald

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