We are newly retired and thinking a lot about the adjustments to our living expenses.

Do you have a view on continuing with health insurance into this next chapter of our lives? We could probably do this but it would mean missing out on other things, such as travel.

A:

Health insurance premiums tend to rise alarmingly fast as you get older. And, given the pretty extensive free health services in New Zealand, and the fact that many top specialists work in public health as well as privately, many retired people drop their health cover.

On the other hand, if you have health insurance, you can often receive treatment much faster. You have more choice about who treats you. And in a private hospital covered by insurance, you will probably get more privacy, better food and so on.

When you're unwell, these issues might matter a lot. Looking at photos of your last trip won't quite make up for slower action, less choice and fewer comforts.

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How to weigh up all of this?

With most insurance - car, house, contents, loss of income and health - I think it's a good idea to get coverage for the big bad stuff, but not for minor mishaps.

For car, house or contents insurance, choose a large excess.

For loss of income, have your payments starting after three months off work rather than one month. For health insurance, skip coverage for GP visits, but keep it for surgery and other major procedures.

That means your premiums will be considerably lower. It also means, of course, that you have to cough up your own money more often. But they won't be huge amounts. And as you pay, keep in mind the lower premiums.

All of this, of course, hangs on the idea that you're not accident-prone or unhealthy. If, for example, you visit your doctor more often than most people you know, it may be wise to retain coverage for GP visits.

One more thing: don't skip health insurance thinking you'll get back into it if your health deteriorates. You won't get coverage for problems you already have - or at least not without paying much higher premiums.

Teens & KiwiSaver

Thanks for the reminder last week with regard to 18-year-olds' contributions to KiwiSaver. My son turned 18 last December so I am just depositing $600 so he gets six or seven months' worth of tax credits.

We had an interesting conversation as he and his uni mates were discussing the virtues - or not - of KiwiSaver. It appears most don't want to contribute as they want or need all the money they can get now. I can understand that given the costs of university.

We chatted through the reasons for this type of saving, the two main ones being free money (in the form of the annual tax credit - who would turn this down?) and the ability to withdraw for a house deposit and get an additional Government contribution for a house if you have been in the scheme long enough.

My son is impressed that with the $1000 Government kick-start we signed him and his sister up for in 2008, and no further contributions, he now has $1700. He has indicated he will opt in when he resumes his part-time job in the holidays, and we will ensure that the $1043 goes in each year.

A:

Despite their reluctance, there are two good reasons why students over 18 should belong to KiwiSaver, and why they - or their parents or generous aunts, uncles or grandparents -should try to contribute at least $1043 each year to get the maximum tax credit.

First, early contributions make a big difference in the long run. Let's say a parent contributes $1043 to a student every year for three years, so the tax credits total $1563. If that money stays in KiwiSaver for 44 years, from age 21 to 65, and earns an average of 5 per cent after fees and tax in a riskier fund, the student will have more than $14,000 extra in retirement. That's close to 10-fold growth.

Second, I think there's a psychological factor. If the student's KiwiSaver account is growing while they study, that might nudge them towards getting right into the scheme when they first start work. Your last paragraph gives us an example of that.

Do the maths

I think your maths about KiwiSaver tax credits last week was slightly askew.

You said, "That's powerful. For non-employees contributing up to $1043 a year, the tax credit multiplies your savings by one and a half. If you would otherwise have retired with $100,000, the tax credit makes it $150,000."

The tax credit is only available for the period from ages 18-65 and is only $521 -- a total available tax credit over the maximum KiwiSaver lifetime of $24,487.

Your example above makes it look like it could be more than this if we could only save more - which isn't actually true.

A:

You and another reader who wrote a similar letter have overlooked something really important - returns on the tax credits, and the compounding of those returns.

Let's say someone was self-employed or not employed, contributed $1043 a year, and therefore got the maximum tax credit every year for 35 years. If their account earned 5 per cent a year after fees and tax, it would total about $150,000 at 65. In a different savings account without tax credits, it would total about $100,000. That's the example I gave.

What's more, if they were in KiwiSaver all the way from 18 to 65, the account would total close to $300,000, compared with $200,000 elsewhere.

And for people who got the $1000 kick-start and the first few years of the bigger $1043 tax credits, the growth would be considerably more - especially as those bonuses were given in the early days so they are compounded over a long time. See the Q&A above on the significance of early contributions.

Another thing: you're assuming the maximum tax credit will never be adjusted for inflation. That's a really iffy assumption over several decades.

Ready to retire?

With regard to your "$1 million retirement target is way over the top" article, it depends on what kind of a lifestyle you want.

If you have a mortgage-free house, you don't have rent to pay. But you do have rates, insurance and maintenance costs, so budget for that and a sizeable emergency fund.

At present, $390.20 after tax is the weekly NZ Super for a single person, which may or may not be around in the future.

I would recommend making a budget for a future you to see how much you can live off if all debts are paid off. And have a trial run to see if the budget is realistic.

Recently, I changed jobs but decided to take a six-week break and live as if I was retired. I gave $390 a week to myself from my "super" account and $200 from my "KiwiSaver" account and was comfortable, as I live with flatmates in Auckland so rent is low.

I did have to visit the doctor so medical expenses were high one week, and I will probably test it again in five years.

What I am trying to say is each person's circumstances will be different, and no one can give you an exact figure on paper - especially with inflation and wondering whether NZ Super would still be around when you retire.

A:

As I've said in recent columns, it's unlikely that NZ Super will be cut nearly as much as most people seem to fear. And given that retirees tend to spend less as the years go by, I don't think inflation is a big worry.

But I like your ideas of drawing up a retirement budget, and doing a trial run.

$1m not needed

Talking easily about money management in everyday conversation in New Zealand seems to be almost taboo, like sex and politics! Those who are doing okay don't like to feel that they might be seen as boasting. And those who aren't don't like to feel that they might seem to be failures in comparison, when in fact this conversation benefits all of those involved.

We two worried like hell about the same stuff as everybody else, well before and indeed after we retired, which was 10 years ago now.

As a retired IT programmer and big fan of Excel, I've documented our progress over the years, and have been successful in planning our after-retirement progress.

We started retirement with $600,000 - the result of 20 years of saving - way less than the $1 million being bandied about.

We decided to leave only our mortgage-free house to our lovely children and enjoy the rest. We have travelled extensively but economically in these first 10 years, knowing that we will almost certainly slow down in the next decade or so. It has been a truly fabulous experience, and we still live very comfortably with more than half our initial capital remaining.

As you advise, we have invested productively in shares for the long term, and laddered bonds and term investments for the near- to medium-term future.

We have upskilled and done this ourselves with no involvement of high-priced advisers, and yes, we've lost some but gained more.

We live on $52,000 a year after tax, made up of Super, investment earnings and by eating some of our capital. We expect to be solely on NZ Superannuation when we are 87, which is fine by us.

A decent retirement is possible. It takes work, persistence, a bit of luck and not being put off by the big numbers, while listening to and acting on good advice.

A:

Many people will find your letter encouraging, so thanks for writing.

We should note that $600,000 10 years ago is worth about $730,000 now, according to the Reserve Bank's inflation calculator. But still, it's well short of $1 million.

Moving the pension

In a recent Q&A, you cited the seemingly easy shift in the state pension age from 60 to 65 (between 1992 and 2001) as evidence that the proposed move to age 67 is not that big a deal.

You may be right that New Zealanders will accept that move - though there is actually no evidence that we need to do it; nor that we really understand its implications.

But the change in 1992-2001 merely returned the age to the position it had been in from 1898 to 1977 (nearly 80 years). It was age 60 for only 15 years.

Reducing the state pension age to 60 was actually (and actuarially) incredibly daft, and I think New Zealanders broadly understood that.

I think that shifting it to an even older age is actually a bigger deal than the "two-year shift compared with a five-year shift" implies.

But again, we have done no research on what those implications might be.

A:

Thanks for the info. It seems to me, though, that most people under 50 are already expecting their NZ Super to start later than 65 - if indeed they have given the topic any thought at all.

Still, that's just me guessing. You're right - some research would be helpful.