The big question: Is $375k, $605k or $1m enough for retirement?
By Susan Edmunds of RNZ
How much do you really need to save for retirement?
Is it $48,000 as suggested by the Massey University retirement spending guidelines for a one-person household living a “no frills” life in a provincial area?
Or $1 million, as mooted by those same guidelines, for a two-person house living a choices life in a main centre.
Or more – as suggested by Koura founder Rupert Carlyon?
The Retirement Income Interest Group – part of the New Zealand Society of Actuaries – has set out to attempt to answer the question.
It said there needed to be a single framework for consistent discussion of what would be an adequate retirement income, and this should be clearly communicated to KiwiSaver members.
The group said there were a few different ways income needs could be assessed.
It could be done based on actual spending of current retirees, as in the Massey guidelines, or hypothetical spending based on the cost of living.
But the data reported on actual spending was not representative of all retirees and the hypothetical basket was hard to interpret into the future.
Instead, calculating a replacement income rate would be more effective, they said.
With this method, a person would be deemed to have sufficient savings if their balance at retirement could generate 80% to 100% of their pre-retirement income, until they were at least 90.
That would mean a median earner would need savings of about $605,000 if their retirement spending was assumed to increase with inflation.
If it were to fall 2% per year, which is a pattern seen in retiree spending, the balance required for would be $375,000.
“Thinking about it in that way is really consistent with the KiwiSaver Act itself which talks about trying to allow people to enjoy standards of living in retirement similar to those in pre-retirement,” said group convenor Ian Perera.
He said it was likely that a 5% KiwiSaver contribution rate, matched by an employer, would deliver the target amount of income for most median-earners.
This was assessed using a 6% drawdown rule, which allows for spending to reduce over a person’s life.
At 4% plus 4%, which the settings are shifting towards, someone who joined the workforce in their early 20s and earned a median income throughout their life and invested in a balanced fund would have a replacement income ratio of 75%, he said.
It was likely to be higher in a growth fund, or if returns were higher than the modelling allowed for.
But he said most people were not investing continuously from 20 to 65. Many would take money out for a first home.
“Then you’ve got less time to make up what you’ve taken out. So that’s important and obviously there’ll be various reasons why people might need to have a savings suspension. They might be taking a career break for family reasons or they might have lost their job.
“These sorts of gaps definitely can have an impact on your replacement rate.”
He said someone who withdrew for a first home would only end up with about 60% of pre-retirement income at a 4% contribution rate.
“I’m not saying that using KiwiSaver to buy a first home isn’t a good thing. We know from the work that the Retirement Commission has done that people who own their own homes are probably in a better position in retirement because the cost of rents are quite a bit higher than the cost of house maintenance and rates and that sort of thing. So It’s a good thing to do but it’s something you’re going to need to make some contributions to.”
The highest income 10% of earners could find they needed to save more than 5% for their own personal targets but they were more likely to have other investments and seek personal advice, anyway.
He said people who were lagging in their saving could make a higher level of contributions in the years before retirement, or retire later.
“Retiring later may lead to over-saving with a high replacement income possibly available until age 100. However, these strategies cannot be relied on as health issues or employment situation may prevent working as late or at the same level as hoped for.”
He said when people knew the income level they wanted to generate, they could work back from that.
“You have NZ Super which is going to provide a significant amount of that target income for most New Zealanders and I guess you have a gap on top of that.
“If you’re a high income earner then that gap is going to be larger because NZ Super doesn’t depend on how much income you earn before retirement. And conversely if you’ve been earning something close to the minimum wage throughout your life then NZ Super provides quite a big chunk of that replacement income.”
He said Sorted’s retirement navigator tool, which allows people to work out how they could spend their KiwiSaver total, would help them to see the picture.
“There’s a variety of different options you could use... your spending tends to go down in real terms through retirement.
“Some people talk about the go-go, slow-go and no-go years of retirement. So when you first retire, a lot of people can be quite active. They might want to be doing holidays and things that they haven’t been able to do when they’re working.
“But there comes a point where you slow down and you’re probably going to be less interested in or capable of doing certain activities.”
- RNZ