Chris Waters: How much do you need to reach your dream retirement?

Saving for retirement requires planning and investing. Photo / 123rf

OPINION

Many hope their retirement is spent with loved ones, pursuing hobbies or enjoying the freedom of not working full-time. But with the current pressures of inflation, interest rates and the cost of living, we need to consider what we could be doing now to help achieve our long-term retirement goals.

So how much do I need to save to achieve my dream retirement?

Of course there is no one answer to this, and it’s difficult to calculate an exact figure as it differs from person to person. However, there is some helpful research that can give us a guide. The key findings from a Massey University survey of retirement spending found the government superannuation will not be enough for even a basic ‘No-Frills’ retirement, which means households will either need other savings or to work part-time to meet retirement living costs.

A two-person household in a metro location would need to save $191,000 for a ‘No-Frills’ lifestyle in their retirement, or $755,000 for a ‘Choices’ lifestyle. A ‘No Frills’ lifestyle reflects a basic standard of living that includes few, if any, luxuries and a ‘Choices’ lifestyle represents a more comfortable standard of living, which includes some luxuries or treats.

There are a few points to highlight:

Firstly, this assumes you are retiring today. For those who are further away from retirement, these figures will increase as inflation drives living costs higher. A two-person household retiring in 15 years would need $257,000 at that point for a No-Frills lifestyle versus $191,000 if they retired today, based on 2 per cent inflation.

Secondly, these figures are for two-person households. The equivalent figures for a one-person household are $277,000 (No Frills) and $561,000 (Choices), reflecting the real challenges in retirement for single people.

Lastly, these amounts assume that all savings will be spent after 25 years of retirement. For those wanting to leave something behind for the family beyond the family home, the amount saved would need to be higher (or the level of spending in retirement reduced).

So how do I go about saving this money?

For all but a few, savings alone won’t be enough, especially as inflation eats into our spending power. Your savings will need to be invested to generate sufficient returns to achieve your goals and the need to invest these funds doesn’t stop once you retire. You need to ensure your investment continues to work hard for you even in retirement, to keep ahead of inflation and ensure your nest egg lasts.

Chris Waters is a senior analyst at Fisher Funds.

A two-income household that started investing into a balanced fund from age 35, would need to save $97 a week for a ‘No Frills’ lifestyle or $384 for a ‘Choices’ lifestyle.

Both these figures are in today’s dollars and would need to increase in line with inflation.

If you are just putting the minimum 3 per cent of your income into your retirement investment, this may not be enough based on the assumptions above. All else being equal, and without reducing your retirement spending – you will need to save more.

While this could seem daunting to some, there are actions you can take right now to help you achieve the retirement you want. These small changes can make a large difference.

Make sure you are in the right fund for how long you have until retirement

If you have a long time before retirement you are generally better off in a growth fund.

By shifting from a balanced fund to a growth fund, a two-income household, both aged 35, would need to save $327 per week (or $57 a week less) to fund a Choices lifestyle.

If they were in a conservative fund they would need to save 17 per cent more weekly than if they were in a balanced fund to achieve the same amount of savings in the same amount of time.

Time horizon matters

The earlier you start saving and investing, the less you need to put aside each week to meet your savings goal, as the power of compounding does its work for you. Starting to save earlier can make a big difference.

If a two-income household in a balanced fund began saving when they were aged 30, they would need to save $316 per week for a Choices lifestyle. If they started at 35 they would need to put away $384 weekly and at 50 would need to save $864 – putting away over twice as much per week compared to if they started at 35. (Source: Fisher Funds - based on assumptions set out in Government regulations)

Finally, owning a mortgage-free property helps in retirement, and can provide additional funds if you choose to downsize. However this is not a free lunch. The flipside is the higher cost of servicing the mortgage could reduce your ability to save for your retirement today.

The estimated monthly mortgage payment on the median New Zealand house with a 20 per cent deposit is currently $3700 or 49 per cent of median household income. The ideal solution is to pay off the mortgage and invest for your retirement at the same time. Paying off the mortgage should not be your only retirement plan.

Benefits of financial planning

No matter what kind of retirement you want, having a plan is crucial. Understanding what kind of retirement you want, and how much you need to save to achieve your retirement goals is a core part of any plan.

There are ways you can help yourself achieve your dream retirement – save more, start earlier, and invest in the appropriate fund for your investment time horizon. Although for some it might seem far away, we all want a long and happy life and planning now can help us achieve this.

Chris Waters is a senior investment analyst at Fisher Funds.