When it comes to retirement it pays to take the right path early in life and save for a secure future. Photo / Supplied
If you're working, you should be thinking about your retirement.
Most of us have some type of planning by default these days in the form of KiwiSaver schemes – but beyond that, what are you doing to prepare yourself financially for the future?
As we've seen all too clearly at the moment, inflation can rise steeply (and costs will increase to some degree over time regardless).
Beyond a rainy-day fund, you need a plan for living comfortably when you are no longer generating income. A dollar today might not be a dollar tomorrow, let alone in 20 years or more … so how do you make your retirement savings work harder for you? Can you depend on superannuation? And how much do you actually need to live?
Instinctually, we may look to our parents for inspiration – but when we're all generally expected to outlive our forebearers, using past good practice as a rule of thumb is a flawed methodology.
Retirement age in New Zealand
While there's been some debate on whether this should change in recent times, the retirement age (the age at which you can start receiving your superannuation payments) is 65.
While there's no set law for retiring at 65, and employers generally cannot force you to retire as this would be age-based discrimination, this is when you will be eligible for the pension.
There are some exceptions based on residency and the amount of time you have lived in either New Zealand, the Cook Islands, Niue or Tokelau since you turned 20. But as things stand, you do not need to earn (or not earn) a certain amount to qualify for New Zealand superannuation – it's not income tested, though the amount you receive may differ if you still have income from other sources.i
At age 45, most Kiwis have 20 years to save before they hit retirement age. Let's assume the average life can be broken down into three phases; 25 years as a child/young adult learning the ropes, then 40 years earning steadily – and from age 65, you could have 35+ years consuming what was saved in 40.
It's a big ask.
If you wait until you're 50 to start, that only gives you 15 years to amass enough for almost 40 years of drawdown. It's a near impossible task, which is why most folk park it 'til next year … and next year … and rinse, and repeat. Or – they plan to hunker down on NZ Super.
How much is the pension in NZ?
While there was a recent superannuation increase in 2022 in NZ, the amount you receive relying solely on the pension is likely not going to be enough to live comfortably, and independently.
How much do you get paid when you're 65 in New Zealand?
The increase in the amount paid in superannuation rose in April 2022 as part of the Government's rollout of income increases, which also saw increases to minimum wage and benefit rates. The NZ Super rates increased by $52 per fortnight for single pensioners living alone (now at $925.88 fortnightly) and by $80 for couples (now at $712.22 fortnightly).ii Note - this is regardless of lifestyle and location, so superannuitants in the city are getting the same rate as smaller centres.
How much do you need to live on in retirement?
Firstly, how far away is retirement for you? What kind of lifestyle do you envision yourself having?
Someone living alone in a provincial area would be getting the most mileage out of their superannuation at roughly $460 weekly after tax, but even with a simple country life they would still be $187 short their estimated weekly expenses.iii
There are many 'rules of thumb' about retirement planning, but no magic number. You can start by thinking about your current costs and which of these will remain by retirement. Having an idea of your annual costs will help you conceptualise how much you would need to live for x number of years once you stop working – and again, given the longer life spans we now enjoy in this modern age, it may have to stretch further than you think.
For comparison, the Australia Government has stated that the average Australian needs to save 15 per cent of their annual take home pay to ensure a consistent level of lifestyle during retirement. That's from their first job, not from when the kids have left home, and they are debt free!
Australia's compulsory super presently sits at 10.5 per cent, and is moving to 12.5 per cent in 2025. Ours is a mere voluntary minimum into KiwiSaver of 6 per cent (3 per cent employer, 3 per cent employee).iv
Financial planning for retirement
There's Sun Tzu quote that goes: "Plan for what is difficult while it is easy, do what is great while it is small."
It will be easier to put a little away now and grow your wealth slowly, than to come up with a larger lump later in life. This is why KiwiSaver a good idea; it takes a little from your pay, a little from your employer, and – as long as you're meeting the minimum contributions annually – a little from the Government too.
A well-rounded investment portfolio can be another great way to make sure your money is working hard for you ... as opposed to leaving all of your savings in the bank, where inflation and fees over time will eat away at your hard-earned money. Risk in investment is tempered by time. The sooner you start, the better.
Other ways you can get yourself in a good position include paying down debt where you can to minimise bills in retirement, and having robust insurance coverage to help take the pain out of unforeseen events – which, again, can be easier to shore up while you're younger.
The path ahead needn't be a mystery – the sooner you start planning, the less you have to ponder the outcome. Financial stress can be a huge burden, and the best way to get around it is to start your journey early, and create a plan for success that you can stick to. Retirement should be a time to slow down and enjoy life, not a creeping source of anxiety as you age.
As with all financial planning, the best approach can be determined by sitting down with the professionals. A chat with a trusted fiduciary about your unique situation and goals is a great place to start.
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
· The information provided, or any opinions expressed in this show, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
i https://www.workandincome.govt.nz/eligibility/seniors/superannuation/superannuation-overview.html#:~:text=You%20may%20qualify%20for%20NZ%20Super%20with%20less%20than%2010,as%20it's%20not%20income%20tested.
ii https://www.beehive.govt.nz/release/government-delivers-income-increases-over-14-million-new-zealanders#:~:text=On%201%20April%202022%3A,per%20fortnight%20for%20a%20couple. iii https://www.massey.ac.nz/documents/476/nz_retirement_expenditure_gudelines.pdf iv https://www.australiansuper.com/superannuation/superannuation-articles/2022/07/30-years-of-super
'The pain was out of this world. I’d rather give birth.'